Opinion ID: 570048
Heading Depth: 1
Heading Rank: 2

Heading: collateral estoppel against the fumigators

Text: 11
12 The fumigators contend on appeal that the district court's grant of summary judgment violated their right to a full and fair hearing on their opposition to Universal's claims because the court enforced against them a decision resulting from arbitration even though they were not party to the arbitration or the agreement mandating arbitration, and did not consent to be bound by the arbitration. Universal cites SCAC Transport (USA), Inc. v. S.S. Danaos, 845 F.2d 1157 (2d Cir.1988) in arguing for preclusion of issues previously litigated in arbitration against a party vouched in to the arbitration who chooses not to defend. 2 We believe that due process may be accorded a party vouched in to an arbitration. 13 [A] right, question, or fact distinctly put in issue and directly determined as a ground of recovery by a court of competent jurisdiction collaterally estops a party ... from relitigating the issue in a subsequent action, if the party had reasonable notice and an opportunity to be heard against the claim. Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir.1982) (footnote omitted). But the due process clause of the United States Constitution protects the right to a full and fair hearing on an issue, and therefore collateral estoppel cannot be applied against a party as to issues not fully and fairly litigated. Blonder-Tongue Lab., Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 91 S.Ct. 1434, 1443, 28 L.Ed.2d 788 (1971); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332, 99 S.Ct. 645, 652, 58 L.Ed.2d 552 (1979); Hardy, 681 F.2d at 338. 14 Preclusion of a previously-litigated issue under the doctrine of offensive collateral estoppel requires that the issue under consideration be identical to the issue previously litigated; that the issue was fully and vigorously litigated in the primary proceeding; that the previous determination of the issue was necessary for the judgment in that proceeding; and that no special circumstances exist that would render preclusion inappropriate or unfair. Parklane Hosiery, 439 U.S. at 326-32, 99 S.Ct. at 649-52; In re Lewisville Properties, Inc., 849 F.2d 946, 949 (5th Cir.1988). 15 The fumigators challenge application of offensive collateral estoppel because the primary determination was rendered in an arbitration proceeding, rather than in a court of law. That challenge fails. The United States Supreme Court declined to bar the offensive use of collateral estoppel from arbitration in subsequent federal court litigation, though the Court required consideration of the federal interests warranting protection. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 223, 105 S.Ct. 1238, 1244, 84 L.Ed.2d 158 (1985). In an arbitrable case not directly involving federal statutory or constitutional rights, 3 courts should use a case-by-case approach to determining the collateral estoppel effects of arbitral findings. See Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1361 (11th Cir.1985) (courts should consider, inter alia, the procedural adequacy of the arbitration proceeding). 16 It is true that arbitral findings typically lack the supervisory scrutiny of authoritative review, giving rise to the argument that arbitration risks determinations based on irrelevant or hearsay evidence, or the personal whims of arbitral panel members. Hulbert, Arbitral Procedure and the Preclusive Effect of Awards in International Commercial Arbitration, 7 Int'l Tax & Bus.Law. 156, 195 (1989) [hereinafter Hulbert]. However, arbitration is a widely-used means of resolving maritime disputes. See SCAC Transport, 845 F.2d at 1163 (citing Feinberg, Maritime Arbitration and the Federal Courts, 5 Fordham Int'l L.J. 245 (1982); G. Gilmore & C. Black, The Law of Admiralty 196 (2d ed. 1975)) (arbitration is especially important and has largely supplanted litigation in maritime dispute resolution). And we assume that rational actors fearing future disagreement would not contract for a biased forum to settle their differences. See Shell, Res Judicata and Collateral Estoppel Effects of Commercial Arbitration, 35 U.C.L.A.L.Rev. 623, 663-64 (1988) [hereinafter Shell]. 17 The application of collateral estoppel from arbitral findings is a matter within the broad discretion of the district court, Parklane Hosiery, 439 U.S. at 331, 99 S.Ct. at 651; Lewisville Properties, 849 F.2d at 949; Hauser v. Krupp Steel Producers, Inc., 761 F.2d 204, 207 (5th Cir.1985), and a district court's discretion in deciding whether to give arbitral findings preclusive effect also keeps the risk of prejudice at an acceptable level, at least when the arbitral pleadings state issues clearly, and the arbitrators set out and explain their findings in a detailed written memorandum. Cf. Shell, supra, at 649 (ambiguity of pleadings may require relitigation); Hulbert, supra, at 197 (absence of written findings and reasons makes preclusion impossible unless necessarily implied from the nature of the claim and award).
18 The fumigators raise no charge of bias or improper use of evidence by the arbitrators. The examination that occurred during the qualification of this arbitral panel establishes that the arbitrators were experienced and disinterested individuals. But the fumigators urge that arbitration would have failed to afford them a full and fair opportunity to present their case. They say that the limitations on pretrial discovery and their inability to call witnesses of their choosing, to conduct cross-examination, and to challenge the admissibility of evidence prejudiced them. See Hulbert, supra, at 193-95 (analysis of preclusive effect depends upon the significance attached to procedural differences between arbitration and court adjudication); Restatement (Second) of Judgments, § 57 & cmt. c (1982) [hereinafter section 57] (arbitral award should have the same preclusive effect as a judgment if arbitration afforded [procedural] opportunity ... substantially similar in form and scope to court adjudication). 19 If the first determination of an issue occurred in an arbitration which afforded litigants the basic elements of adjudicatory procedure, a district court may find in a proper case that the arbitral award collaterally estops relitigation of the previously determined issues. Greenblatt, 763 F.2d at 1360. A district court in exercising its discretion must carefully consider whether procedural differences between arbitration and the district court proceeding might prejudice the party challenging the use of offensive collateral estoppel. 20 The district court specifically must determine whether procedural opportunities available to the party in the subsequent action might be likely to cause a different result. Parklane, 439 U.S. at 332, 99 S.Ct. at 652. But a party who chooses not to appear in a proceeding despite having notice and an opportunity to be heard, and who later challenges the preclusive effect of determinations made in the proceeding, must make a particularized showing of harm to establish the prejudicial effect of procedural differences. See SCAC Transport, 845 F.2d at 1163 (opponent of collateral estoppel has burden to demonstrate specific prejudice from arbitral procedures); but see also Carlisle, Getting a Full Bite at the Apple: When Should the Doctrine of Issue Preclusion Make an Administrative or Arbitral Determination Binding in a Court of Law, 55 Fordham L.Rev. 63 (1986) (suggesting burden should rest with the proponent of preclusion). 21 The fumigators argue that some evidence introduced by GASC on liability and damages would have been subject to hearsay objection, and that the fumigators would have cross-examined the witnesses if the proceeding occurred in district court. The fumigators also complain that the parties to the arbitration did not call witnesses favorable to the fumigators' position. But the fumigators do not point to any specific arbitral procedures that would have prevented their making hearsay objections and calling their own witnesses, had they chosen to appear. Their complaints thus result from their rejection of the vouching notice, not from any identified procedural differences between arbitration and district court. 22 The fumigators also argued in a hearing before the district court that their discovery would have been compromised in arbitration, where the arbitral panel controls the scope and extent of discovery, while in district court they would have enjoyed an unfettered right to conduct discovery. In rejecting this contention, the district court noted it has authority to entertain and grant motions to quash, and thus at least as much power as arbitrators to limit discovery. In their briefs on appeal, the fumigators fail to identify any allowable district court discovery that would be denied them under the discovery rules pertaining to arbitration. In fact, the fumigators make only vague allusions to procedural differences in discovery between this arbitration and district court, and we are unable to ascertain from the briefs that such differences even exist. The fumigators have not made a particularized showing of harm.
23 The fumigators also contend that it was unfair to use collateral estoppel against them because they were vouched in to an arbitration despite having no duty to indemnify or defend Universal. Even if they were properly vouched in, the fumigators say that their interests were not adequately represented in the arbitration and therefore the district court's application of collateral estoppel was improper. We reverse the judgment for the reason that Universal could not have represented the fumigators' interests in the arbitration. 24 Vouching is a common-law device whereby a defendant notifies the vouchee, a nonparty alleged indemnitor, 25 (a) of the pendency of the suit against him; (b) that if liability is found, the defendant will look to the vouchee for indemnity; (c) that the notice constitutes a formal tender of the right to defend the action; and (d) that if the vouchee refuses to defend, it will be bound in any subsequent litigation between them to the factual determinations necessary to the original judgment. 26 Humble Oil, 444 F.2d at 735. Vouching helps to avoid duplicative litigation and the risk of inconsistent results in adjudicating indemnification claims. See SCAC Transport, 845 F.2d at 1162 (explaining utility of vouching). Vouching is reserved primarily for cases in which the vouchee cannot be impleaded because the vouchee is not subject to personal jurisdiction. Humble Oil, 444 F.2d at 735 n. 15; 18 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4452 at 445-46. An alleged indemnitor who is vouched in to a court proceeding may be subject to having the prior determination used against the vouchee in the subsequent indemnification action even if the vouchee does not appear and defend in the first action. Wisconsin Barge Line Inc. v. The Barge Chem 300, 546 F.2d 1125, 1128 (5th Cir.1977); Odd Bergs Tankrederi A/S v. S/T Gulfspray, 650 F.2d 652, 654 (5th Cir.1981). 27 Generally, once the alleged indemnitor is vouched in, the vouchee must choose either to appear and defend or to decline the tender, though the vouchee must make this choice without the benefit of an authoritative determination of the primary defendant's right of indemnification. If the vouchee declines, the vouchee loses certain prerogatives in any subsequent indemnification action brought by the primary defendant, and results of the primary lawsuit may be binding in the subsequent action. For example, the alleged indemnitor may not contest the validity of the primary defendant's liability to the injured party. He may contest only whether notice was sufficient, whether he has a duty to indemnify, and whether the prior judgment was obtained by fraud or collusion. See generally Comment, Due Process Constraints on Vouching as a Device to Bind Non-Parties, 14 Colum.J.L. & Soc.Probs. 189, 192 (1978) (describing typical mechanics of common-law vouching); Wright, Miller & Cooper, supra, at 440-41 (same). 28 This court recognizes vouching as a valid procedural device. Odd Bergs, 650 F.2d at 654; Wisconsin Barge, 546 F.2d at 1128. In this case, vouching procedure gave the alleged indemnitors adequate notice and the opportunity to be heard in the primary action. In light of what we have said about issue preclusion from arbitration, we find no reason to apply a different rule when the alleged indemnitor is vouched in to an arbitration as opposed to a court proceeding, assuming that a district court is convinced that the arbitration fully and fairly litigated the issues to be precluded. 29 But there is a potential problem with applying collateral estoppel against a party who was vouched in but did not appear to defend. The district court thought that the defendant in the primary action, who vouches in his putative indemnitor, has no duty whatsoever to defend the interests of the indemnitor in order to obtain the benefit of subsequent preclusion as to issues relevant to the indemnitor's liability. 4 In some cases, therefore, those issues will not be fully and fairly litigated. Other authorities express similar concerns because, inter alia, a conflict of interest between the indemnitor and the indemnitee could interfere with full and fair litigation of issues.
30 Section 57 has guided this court's application of issue preclusion to indemnification suits such as this, involving no contractual duty to defend. 5 Wisconsin Barge, 546 F.2d at 1128 & n. 1. When an indemnitor is vouched in to an action with reasonable notice and an opportunity to defend, a judgment against the indemnitee ordinarily has several effects in a subsequent action for indemnification:(a) The indemnitor is estopped from disputing the existence and extent of the indemnitee's liability to the injured person; and 31 (b) The indemnitor is precluded from relitigating issues determined in the action against the indemnitee if: ... (ii) the indemnitee defended the action with due diligence and reasonable prudence. 32 Section 57(1). But a conflict of interest between the indemnitee and the indemnitor would preclude the indemnitor from accepting the defense of the indemnitee in the primary action, and would compromise the indemnitee's defense of the indemnitor's interests. Conflict occurs when the injured person's claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the scope of the indemnitor's obligation to indemnify and another of which is not. Id. In that event, estoppel precludes only those issues in the indemnity action as to which 33 (a) there was no conflict of interest between the indemnitee and the indemnitor; and 34 (b) the indemnitee conducted a defense with due diligence and reasonable prudence. 35 Section 57(2); see also SCAC Transport, 845 F.2d at 1163 (indemnitor bound only when its interests have been adequately represented ... by the indemnitee); Jamaica Commodity Trading Co. v. Connell Rice & Sugar Co., 766 F.Supp. 138, 151 (S.D.N.Y.1991) (no collateral estoppel if party seeking preclusion could not reasonably forward [the absent party's] arguments without exposing itself to liability); Wright, Miller & Cooper, supra (explaining difficulties created by conflict of interest under the representational model of preclusion). 36 We think that the Parklane requirement that the defendant in the first action have incentive in that action to litigate the lawsuit fully and vigorously also mandates conflict-free representation of issues sought to be precluded. 439 U.S. at 332, 99 S.Ct. at 652. For an issue to be vigorously litigated, opposing interests must diligently contest the issue. A defendant having a conflict of interest with a putative indemnitor on a particular issue cannot contest that issue diligently in the Parklane sense. 37 This case presents an additional complication. Common-law vouching practice permits the vouchee to contest the basis and scope of indemnification in the second action. See, e.g., Humble Oil, 444 F.2d at 735, citing Barber-Greene Co. v. Bruning Co., 357 F.2d 31, 34 (8th Cir.1966) (indemnitor's liability generally remains to be proved in the indemnification action). But a vouchee may not relitigate in the indemnification action an issue properly determined in the first proceeding merely because it is arguable that he had no duty to indemnify. See section 57, cmt. b. So the combination of these two principles requires that the court contemplating preclusion consider together (1) the scope of the putative indemnitor's duty, under whatever theory is properly available to the indemnitee, and (2) the existence in the first proceeding of any liability claims against the indemnitee which fall outside the scope of indemnification, thus raising issues tainted by conflict of interest and requiring relitigation. 38 In sum, an alleged indemnitor who is vouched in to the primary action but declines to defend is bound by the findings in that action, but only as to those unconflicted issues on which its interests were adequately represented in the action. SCAC Transport, 845 F.2d at 1162; Wright, Miller & Cooper, supra, at 444; see also Jamaica Commodity Trading, 766 F.Supp. at 150-51. Adequate representation makes sure that the issues of shared concern to the indemnitee and indemnitor alike are actually and fully litigated. See Wright, Miller & Cooper, supra (default judgment ordinarily will not bind the indemnitor). The district court did not analyze the issues of conflict of interest or adequate representation because it thought Universal had no duty to represent the fumigators' interests. 39 In deciding whether a conflict existed between Universal and the fumigators in the arbitration, and whether representation was adequate, we must consider briefly Universal's theories of indemnification and the issues raised thereby, along with the issues raised by the injured party's claims in arbitration, to decide whether any of the latter are outside the scope of indemnification. If so, then the indemnitee has no recourse to collateral estoppel to preclude subsequent litigation of the issue, and summary judgment in this case is inappropriate. Because we find potential conflict between Universal and the fumigators pervasively present in the arbitration, we do not consider whether Universal's representation was adequate. 40 Universal's indemnification action asserts claims based on the warranty of workmanlike performance (WWLP) implied in all maritime contracts under Ryan Stevedoring Co. v. Pan-Atlantic S.S. Corp., 350 U.S. 124, 76 S.Ct. 232, 100 L.Ed. 133 (1956), 6 and on common-law tort indemnification principles as expressed in Wisconsin Barge, 546 F.2d at 1128. A contractor's breach of the WWLP is within the scope of its indemnification of the vessel owner, but may be excused by negligence of a certain type on the part of the owner. Bosnor, 796 F.2d at 784; Bass, 749 F.2d at 1167. Common law indemnification also makes owner negligence a defensive issue. Wisconsin Barge, 546 F.2d at 1128. 41 A conflict of interest arose in the arbitration because GASC pleaded Universal's independent negligence as a theory of recovery in the arbitration. 7 Because GASC's suit raised independent negligence, as opposed to mere negligent hiring of J-Chem, the conflict divided Universal and the fumigators on issues of fault. The fumigators could not be expected to vouch in and defend Universal against a claim based on Universal's negligence because, under either indemnification theory pleaded, Universal's negligence is outside the scope of indemnification. 8 A finding of Universal's negligence could relieve the fumigators from liability, so the fumigators could defend themselves by shifting liability to Universal. And Universal could not effectively represent both itself and the fumigators because, in order to represent the fumigators, Universal would in essence have to shift liability to its own shoulders by arguing its own negligence. We are convinced that Universal charted its course through the arbitration with one eye fixed upon this indemnification suit. 42 The issues of proximate cause and damages allocation also were tainted with the same type of conflict in the arbitration. Universal here seeks full indemnification from the fumigators for money paid in settlement of all GASC's claims. However, the arbitral pleadings reflect considerable argument over the cause of certain items of damages, argument occasioned, we assume, by the fire statute which would require segregation of fire-related damages, by GASC's contention that certain acts of Universal exacerbated damages, by GASC's contention that Universal was responsible for shorting, and by Universal's contention that cargo was damaged, miscounted or infested during discharge in Egypt. The fumigators' possible arguments regarding proximate cause and damages had no voice in the arbitration. 43 We do not believe, however, that there is any genuine issue of material fact regarding the cause-in-fact of the fire. We think that the evidence establishes that the settling and shifting of cargo during transport caused loose Phostoxin tablets to pile up and generate sufficient heat in the course of their chemical transformation to ignite nearby flammable materials. While excessive moisture also may ignite Phostoxin, only speculative testimony tended to show that any dangerous level of condensation, above that required to stimulate Phostoxin's expected fumigant effects, actually occurred within the holds. We do not believe a conflict could exist in the arbitration on an issue with no colorable grounds for dispute.