Opinion ID: 2205859
Heading Depth: 1
Heading Rank: 2

Heading: Party Preclusion

Text: Defendants' former law partner, R. Gale Rhodes, commenced the prior action in 1987 against plaintiffs as trustees of two trusts, the corpuses of which were patents covering prosthetic devices plaintiffs had invented. Plaintiffs were the named trustees and each a one-third beneficiary in the two trusts. Rhodes and defendants were each a one-ninth beneficiary of the total royalty income derived from the patents held in Trust I. Their beneficial interests accorded with the terms of a 1974 retainer agreement the plaintiffs had signed when Rhodes' and defendants' law firm undertook to provide the legal services for obtaining those patents, mostly accomplished before Rhodes withdrew from the firm in 1981. Rhodes, but not defendants, was a beneficiary of Trust II, compensating him for patent-related legal services to plaintiffs after he left the firm. Count I of Rhodes' complaint pertained exclusively to plaintiffs' alleged breaches of fiduciary duty as the trustees of Trust I. He charged that plaintiffs unlawfully diverted and mishandled trust income for their own personal interests. Rhodes sought an accounting from plaintiffs and that they be personally surcharged and removed as trustees. As beneficiaries of Trust I, defendants would have been directly affected by the relief Rhodes requested. Hence, they concededly were necessary parties as to that cause of action, and Rhodes joined them as defendant-beneficiaries in response to plaintiffs' motion to dismiss based upon nonjoinder. It is uncontroverted that they did not actively participate in the lawsuit, however. Some four years after Rhodes initiated suit, plaintiffs, as individuals, interposed five counterclaims against him alone. Their third counterclaim sought ab initio rescission of Rhodes' interest in Trust I, on the ground that, as their attorney in processing the applications for the patents held in the trust, he had a conflict of interest and breached his fiduciary duty to them by inducing them to enter into a retainer agreement giving him a proprietary interest in their inventions. Four years later, plaintiffs sought for the first time to amend their answer to extend that counterclaim to defendants. That motion was denied. Plaintiffs then brought this separate action against defendants, which was stayed while Rhodes' suit proceeded to trial. The trial concluded with a judgment in plaintiffs' favor on their third counterclaim. On the foregoing procedural facts, the majority agrees with the Appellate Division that defendants are collaterally estopped, on the basis of their presence as essential parties in the prior action (i.e., party preclusion), from defending the validity of their interests in Trust I. The majority quotes with approval the Appellate Division's statement that a ` party to a lawsuit cannot sit by idly while a contract, to which he is also a party, is judicially construed' (majority opn, at 305 [emphasis supplied]). There are two fatal factual flaws in the foregoing reasoning, as a close examination of the pleadings and procedural history of the prior suit discloses. First, defendants were not parties to the entire prior litigation. Rhodes merely joined them as trust beneficiaries on his claim in Count I of his complaint. That cause of action related solely to alleged misconduct of plaintiffs as trustees of Trust I. In defending against Rhodes' claim in Count I, plaintiffs neither placed in issue the validity of Trust I nor defendants' status as trust beneficiaries. Then, in counterclaiming individually (not as trustees) against Rhodes to rescind only his beneficial interests in Trust I and Trust II, plaintiffs again refrained from challenging the validity of Trust I or defendants' beneficial interests in it. Had they done so, obviously, defendants would have been necessary parties to the counterclaim, requiring cross-claim joinder by plaintiffs, just as joinder had been required on Rhodes' Count I cause of action ( see, CPLR 3019 [b]; Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR 3019, at 216). Furthermore, in the former litigation, plaintiffs themselves must have determined that defendants' nominal party status on Rhodes' Count I cause of action was insufficient to bind them conclusively to any judgment favorable to plaintiffs on their third counterclaim. Otherwise, plaintiffs would not have moved to join defendants on the counterclaim, a totally unnecessary procedure if the litigation on the counterclaim with Rhodes alone would have preclusive effect on defendants. [1] Plaintiffs, not defendants, were the parties who s[at] by idly through eight years of the litigation, including protracted discovery, before attempting to join defendants as parties to the counterclaimthe procedural relief necessary to give the adjudication on their counterclaim in the Rhodes action preclusive effect against defendants. The majority's further conclusion, that defendants, as parties to the Rhodes action with notice of the issues to be decided in that case (majority opn, at 305), had a full and fair opportunity to litigate the validity of Trust I and of their rights under it, is also unsupported by the record and contrary to our collateral estoppel jurisprudence. The trial judge in the prior action denied plaintiffs' 1995 motion to amend their answer to extend their third counterclaim to defendants. That ruling, which was not appealed, was based in part on findings that the request came after the note of issue was filed following protracted discovery, and that to grant the request would have either curtailed necessary additional discovery, or further delayed the trial of this eight year old lawsuit. New discovery would have been vital to all parties and especially defendants, if they had been joined on the counterclaim, because their affidavits herein show that they had extensive dealings with plaintiffs separate from Rhodes, both before and after his withdrawal from the law partnership. Of particular importance in this regard, defendants have averred that, independently of Rhodes, at or near the inception of the lawyer-client relationship, they advised plaintiffs of the potential conflict of interest and to seek independent counsel regarding the parties' proprietary interests/contingent fee arrangement. Indeed, the majority finds especially critical that Rhodes failed to so address plaintiffs at the time of the proposed incorporation of Biomedical Engineering Corporation (BEC) which resulted in converting the one-third interest in a single invention into a one-third equity interest in a corporation that would exploit all future inventions (majority opn, at 299). While Rhodes conceded never giving such advice, defendant Bain stated in a sworn affidavit in this action: At this point and before the corporation was formed, I personally undertook to advise Buechel and Pappas that they should consult an independent attorney with respect to their dealings with us which now was in the nature of a business rather than legal representation alone. I did this on two separate occasions in 1974 in our law offices. On one occasion I was alone with Buechel and Pappas and on the other Gilfillan, Buechel, Pappas and I were present. On each occasion, I explained to them that there was an inherent conflict of interests in the proposed relationship. I also explained to them that they should seek independent counsel and could seek our services from other attorneys. It would seem self-evident that, had the Rhodes trial court granted the motion to join defendants on plaintiffs' counterclaim and then ordered that the trial proceed expeditiously, the resultant curtailment of defendants' right to engage in discovery would have denied them a full and fair opportunity to defend the validity of their beneficial interests in Trust I. Surely, then, the total absence of participation, including the entire loss of opportunity for discovery, occasioned by the Rhodes v Buechel trial court's refusal to grant plaintiffs' motion to join defendants on their counterclaim, must also be a denial of a full and fair opportunity to litigate. The majority also disregards entirely our precedents holding that a party is denied a full and fair opportunity to litigate in a prior action when a practical inquiry into `the realities of litigation'  reveals that the party lacked any serious incentive to fully and vigorously participate ( Gilberg v Barbieri, 53 NY2d 285, 292). Under the uncontested facts in the record in Rhodes v Buechel, defendants had every disincentive to fully litigate there the issue of the validity of Trust I and of their beneficial interests in it. First, they were unwilling participants in that action, joined only as defendant-beneficiaries when plaintiffs moved to dismiss Rhodes' complaint for failure to join them as necessary parties. Second, it is entirely undisputed that, until the falling out between plaintiffs and defendants in 1995, leading quickly to plaintiffs' motion to amend the answer to force defendants' active trial participation on the issues raised by their counterclaim, defendants continued to furnish legal services to plaintiffs and the trust and to regularly receive from plaintiffs as trustees their fractional share of the substantial trust income. Third, defendants had no direct stake in the outcome of the Rhodes suit. Plaintiffs' counterclaim unequivocally sought only to invalidate Rhodes' interests in Trust I because of his breach of fiduciary duty. [2] Indeed, in their affirmative defenses, plaintiffs relied upon provisions of the trust instrument and upon defendants' approval, in their capacities as trust beneficiaries, of plaintiffs' conduct as trustees. Certainly then, through the nearly eight years of litigation prior to plaintiffs' 1995 motion to amend the counterclaim, the last thing defendants would have wanted was the conversion of their harmonious lawyer/client, trustee/beneficiary relationships with plaintiffs into a fully adversarial one in the Rhodes v Buechel litigation. It follows from the foregoing that here, even more than in Staatsburg Water Co. v Staatsburg Fire Dist. (72 NY2d 147, 154), defendants were [a]t most    interested, albeit unwilling participant[s] in the prior action. Likewise, the lack of any direct stake in the outcome of the proceeding left defendant[s] with little incentive to fully litigate the issue ( id. ). Thus, even if it could be argued here that defendants were granted the opportunity to participate [in the Rhodes litigation], this did not necessarily amount to a full and fair opportunity to contest the determination ( id. ). Apparently addressing the total absence of defendants' incentive to litigate plaintiffs' counterclaim in Rhodes v Buechel, the majority relies upon a January 1995 letter from defendant Gilfillan to plaintiffs' counsel in which he questioned `whether or not we must become active in the Rhodes litigation to protect our rights' (majority opn, at 301). The majority implies that this letter demonstrated that defendants anticipated the preclusive effect of a judgment in plaintiffs' favor on their counterclaim. There are two short answers to that suggestion. First, the issue raised by defendants in that letter had no relationship whatsoever to plaintiffs' counterclaim. It concerned whether, under the terms of Trust I, the legal fees paid to outside counsel in a specific foreign litigation, the Link suit, regarding one of the trust's patents were chargeable to the lawyers/beneficiaries rather than considered to be out-of-pocket expenses or disbursements [of the trusts]. That issue directly pertained to the kind of trustee misconduct alleged in Rhodes' Count I of the complaint, to which defendants were nominal parties. Defendants, on that issue, could very well have been apprehensive as to whether they should participate in the Count I litigation in Rhodes v Buechel to protect their rights vis-à-vis the position of the Trustees regarding [outside counsel] legal fees. Plaintiffs' counterclaim, on the other hand, dealt with the entirely separate issue of Rhodes' misconduct as their attorney. Even if the majority's implication that defendants' letter demonstrated their apprehension as to the preclusive effect of a judgment on the counterclaim in the former action is a fair one (which it is not), it would not be sufficient to establish an incentive to litigate on the part of defendants in their individual capacity in the Rhodes v Buechel action. As we said in Staatsburg Water Co., it would be    fundamentally unfair to give preclusive effect to a determination where the only incentive to litigate stems from its potential collateral effects. Such a ruling would ill serve the litigation-limiting purposes of collateral estoppel ( id., at 155 [emphasis supplied]). Defendants' disincentive to fully litigate their rights under Trust I in the Rhodes v Buechel case did not cease when hostilities between them and plaintiffs arose in 1995, followed promptly by plaintiffs' motion to amend their counterclaim in Rhodes. These developments occurred after protracted discovery and the filing of the note of issue, when the trial of the action was imminent. As previously discussed, to enter the litigation at that point would have entailed waiver of the opportunity to engage in full discovery, a great handicap for defendants. Moreover, there was an even more imperative strategic reason for defendants to avoid joinder on the counterclaim in Rhodes v Buechel, derived from New York's earlier abandonment of the mutuality of estoppel doctrine. Prior to B.R. DeWitt, Inc. v Hall (19 NY2d 141), New York ostensibly adhered to the so-called rule of mutuality of estoppel, [which provided that] unless both parties [to the subsequent action] are bound by the prior judgment, neither may use it ( id., at 144). In B.R. DeWitt, however, we announced that the `doctrine of mutuality' is a dead letter ( id., at 147) and that, henceforth, collateral estoppel could be invoked, either defensively or offensively by a nonparty to the prior litigation, providing that the requirements for collateral estoppel (identity of issues and full and fair opportunity to litigate) were met as to the party sought to be precluded ( see, id., at 148). There being no mutuality of estoppel, defendants had everything to lose and nothing to gain from active participation in the counterclaim litigation regarding the validity of the 1974 retainer agreement and of their beneficial interests in Trust I. Had those issues been resolved against plaintiffs on their counterclaim in Rhodes, defendants could have used the judgment defensively in any subsequent suit by plaintiffs, such as the instant one, to preclude plaintiffs from attacking the validity of the retainer and trust instruments. On the other hand, as nonparties to the counterclaim litigation in Rhodes, defendants ordinarily would not be bound by a disposition of that counterclaim favorable to plaintiffs. [3] Refraining from active participation in the trial of the issues raised by plaintiffs' counterclaim in the Rhodes case, was, thus, a completely understandable and legitimate strategy for defendants. The umbrage against defendants taken by the majority and the Appellate Division for sit[ting] by idly in implementation of that strategy is better directed at this Court's abandonment of the mutuality of estoppel doctrine, not at defendants for taking advantage of that abandonment.