Opinion ID: 870173
Heading Depth: 2
Heading Rank: 2

Heading: Res Judicata Principles

Text: Res judicata, or claim preclusion, and collateral estoppel, or issue preclusion, are doctrines that limit a litigant to one opportunity to litigate aspects of the case to prevent inconsistent results and multiplicity of suits and to promote finality and judicial economy. Dorrance v. Lee, 90 Hawai#i 143, 148-49, 976 P.2d 904, 909-10 (1999).8 Claim preclusion and issue preclusion are, however, separate doctrines that involve distinct questions of law. Claim preclusion prohibits the parties or their privies from relitigating a previously adjudicated cause of action; issue preclusion, by contrast, prevents the parties or their privies from relitigating any issue that was actually litigated and finally decided in the earlier action. Bremer v. Weeks, 104 Hawai#i 43, 54, 85 P.3d 150, 161 (2004) (internal brackets, citations, emphases, and quotation marks omitted). This court explained the purposes of the res judicata doctrine in Kauhane v. Acutron Co., Inc.: 8 At times, Hawai#i appellate cases may have conflated the two doctrines. See R. Endo, Res Judicata and Collateral Estoppel in Hawaii: One of These Things is Not Like The Other, 3 H AW . B.J. No. 13, 1 (1999). 10 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER According to the doctrine of res judicata, the judgment of a court of competent jurisdiction is a bar to a new action in any court between the same parties or their privies concerning the same subject matter, and precludes the relitigation, not only of the claims which were actually litigated in the first action, but also of all grounds of claim . . . which might have been properly litigated in the first action but were not litigated or decided. The purpose of the doctrine of res judicata is to prevent a multiplicity of suits and to provide a limit to litigation. It serves to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication. The res judicata doctrine thus furthers the interests of litigants, the judicial system and society by bringing an end to litigation where matters have already been tried and decided on the merits. It is a rule of fundamental and substantial justice, of public policy and private peace. The doctrine therefore permits every litigant to have an opportunity to try his case on the merits; but it also requires that he be limited to one such opportunity. Unsatisfied litigants have a remedy: they can appeal through available channels. But they cannot, even if the first suit may appear to have been decided wrongly, file new suits. 71 Haw. 458, 463-64, 795 P.2d 276, 278-79 (1990) (internal brackets, citations, and quotation marks omitted). We further explained in Bremer: Claim preclusion . . . prohibits a party from relitigating a previously adjudicated cause of action. Moreover, the judgment of a court of competent jurisdiction is a bar to a new action in any court between the same parties or their privies concerning the same subject matter, and precludes the relitigation, not only of the issues which were actually litigated in the first action, but also of all grounds of claim and defense which might have been properly litigated in the first action but were not litigated or decided. The party asserting claim preclusion has the burden of establishing that (1) there was a final judgment on the merits, (2) both parties are the same or in privity with the parties in the original suit, and (3) the claim decided in the original suit is identical with the one presented in the action in question. 104 Hawai#i at 54, 85 P.3d at 161 (emphasis added). It is important to note that res judicata precludes not only the relitigation of claims or defenses that were litigated in a previous lawsuit, but also of all claims and defenses that 11 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER might have been properly litigated, but were not litigated or decided. This part of the res judicata doctrine is reflected in the Restatement (Second) of Judgments, Sections 18 and 22: § 18. Judgment For Plaintiff -- The General Rule Of Merger When a valid and final personal judgment is rendered in favor of the plaintiff: (1) The plaintiff cannot thereafter maintain an action on the original claim or any part thereof, although he may be able to maintain an action upon the judgment; and (2) In an action upon the judgment, the defendant cannot avail himself of defenses he might have interposed, or did interpose, in the first action. § 22. Effect Of Failure To Interpose Counterclaim (1) Where the defendant may interpose a claim as a counterclaim but he fails to do so, he is not thereby precluded from subsequently maintaining an action on that claim, except as stated in Subsection (2). (2) A defendant who may interpose a claim as a counterclaim in an action but fails to do so is precluded, after the rendition of judgment in that action, from maintaining an action on the claim if: (a) The counterclaim is required to be interposed by a compulsory counterclaim statute or rule of court, or (b) The relationship between the counterclaim and the plaintiff’s claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action. C. The Estebans’ TILA Rescission Rights are Barred by Res Judicata Principles Eastern asserts that the Estebans’ TILA rescission claim is barred by res judicata.9 9 This court previously addressed the effect of a foreclosure judgment on a subsequent suit for common law rescission applying principles of collateral estoppel, or issue preclusion, in Ellis v. Crockett, 51 Haw. 45, 451 P.2d 814 (1969). In Ellis, sellers of real property obtained summary judgment in a mortgage foreclosure lawsuit. 51 Haw. at 48, 451 P.2d at 818. In a subsequent suit, purchasers sued various parties for allegedly failing to (continued...) 12 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER To reiterate, the party asserting claim preclusion has the burden of establishing that (1) there was a final judgment on the merits, (2) both parties are the same or in privity with the parties in the original suit, and (3) the claim presented in the action in question is identical to the one decided in the original suit, or to a claim or defense that might have been properly litigated in the first action but was not litigated or decided. Bremer, 104 Hawai#i at 54, 85 P.3d at 161. Applying these requirements to the facts at hand, we conclude that the Estebans’ TILA rescission claims are barred by res judicata principles. (...continued) disclose certain information when they demanded full payment of the principal amount pursuant to an acceleration clause in the agreement. 51 Haw. at 47-48, 451 P.2d at 818. The trial court dismissed the suit for failure to state a claim, and purchasers appealed. 51 Haw. at 49, 451 P.2d at 819. This court affirmed the dismissal, holding, inter alia, that various claims brought by purchasers, including a claim for rescission of the underlying agreement, were barred by the doctrine of collateral estoppel. 51 Haw. at 56-58, 451 P.2d at 822-24. We noted that the subsequent claim for fraud was clearly distinct from the claim raised in the foreclosure case, the parties were cast in different roles as plaintiff and defendant, and the legal consequence of each case was different. 51 Haw. at 56, 451 P.2d at 822. Nonetheless, we held that collateral estoppel applied because all issues regarding the validity of the mortgage instrument had been decided when the court granted foreclosure in the prior case. 51 Haw. at 57, 451 P.2d at 823. We concluded, “The rescission action is barred because the court granted the foreclosure in the prior suit, thereby deciding all issues relating to the mortgage instrument in favor of [the defendants-vendors]. The issue underlying that judgment may not be collaterally attacked.” 51 Haw. at 57, 451 P.2d at 823 (emphasis added). Although it could be argued that the Estebans’ claims may also be precluded by issue preclusion based on Ellis and Section 27 of the Restatement (Second) of Judgments (“When an issue of fact . . . is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim[]”), because the parties have argued this case based on res judicata principles, we decide this case on res judicata grounds. 13 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER First, under Hawai#i law, there was a final judgment on the merits when the time to appeal the Foreclosure Judgment expired. See Glover, Ltd. v. Fong, 42 Haw. 560, 574 (1958).10 Moreover, under Hawai#i law, res judicata principles apply to default judgments. Fuller v. Pac. Med. Collections, Inc., 78 Hawai#i 213, 219, 891 P.2d 300, 306 (App. 1995). Second, both the Estebans and Eastern were parties to the prior foreclosure proceeding. Third, a TILA rescission claim would have been properly litigated in the foreclosure action, whether as a counterclaim or as an affirmative defense. In Pacific Concrete, 62 Haw. at 342, 614 P.2d at 941, we recognized that TILA violations may be raised in a counterclaim. In that case, a creditor sued a debtor for the outstanding balance owed on two loans, and the debtor counterclaimed, alleging that the creditor failed to satisfy TILA’s disclosure requirements. 62 Haw. at 335, 614 P.2d at 934. The lender asserted that the counterclaim was barred because it 10 It is well established that under Hawai#i law, “foreclosure cases are bifurcated into two separately appealable parts: (1) the decree of foreclosure and the order of sale, if the order of sale is incorporated within the decree; and (2) all other orders.” Sec. Pac. Mortg. Corp. v. Miller, 71 Haw. 65, 70, 783 P.2d 855, 857 (1989) (holding that a judgment of foreclosure and order of sale is final even though matters incident to its administration remain, and a party seeking to challenge a foreclosure judgment must do so within the thirty-day period following entry of the decree). The Estebans contend that they may exercise their right to rescind up to and until the court’s confirmation of sale. However, foreclosure has the legal effect of terminating a mortgagor’s interest in the subject property, and therefore, a foreclosure judgment constitutes a final judgment. See Ellis, 51 Haw. at 57, 451 P.2d at 823. 14 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER was not brought within one year, as allegedly required by 15.U.S.C. § 1640(e).11 Id. This court reasoned that the debtor’s claims were “in the nature of a recoupment defense,” which would diminish the creditor’s recovery, and the alleged TILA violations “arose out of the same loan transaction as [the creditor’s] suit[.]” 62 Haw. at 341, 614 P.2d at 940 (emphasis added). We noted that “TILA seeks to protect the consumer by ensuring full disclosure of credit cost” and concluded that “[d]enying debtors their counterclaims in this situation could work an injustice and undercut the aim of the TILA.”12 62 Haw. at 342, 614 P.2d at 941 (noting that consumers are typically unaware of their rights under TILA until a creditor files suit to collect on the outstanding loan). We recognized that a claim alleging 11 Section 1640 of TILA governs “Civil liability.” At the time of our decision in Pacific Concrete, subsection (e) provided: (e) Any action under this section may be brought . . . within one year from the date of the occurrence of the violation. 15 U.S.C. §1640(e) has since been amended, and it now specifically contains the following sentence: “This subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.” 12 In allowing the debtor to allege a TILA counterclaim, we explained: Section 1640(e), the statute of limitations provision of the TILA serves to further enforcement of the Act’s civil liability provisions by ensuring the prompt bringing of suits. Deterrence of lenders’ violations rather than compensation of borrowers is the goal. Thus, allowing a borrower’s claim under the Act as a defense to the lender’s original suit is in keeping with this overall scheme. 62 Haw. at 343, 614 P.2d at 942. 15 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER violations of TILA’s disclosure requirements arose out of the same transaction as a suit seeking enforcement of the underlying loan agreement. Id. Accordingly, we acknowledged that the debtor’s TILA claim could be asserted as a counterclaim against the lender. Id. In Beach v. Ocwen Federal Bank, 523 U.S. 410, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998), the United States Supreme Court alluded to the possibility of asserting the TILA rescission right under 15 U.S.C. § 1635 as an affirmative or other defense. The question presented in the case was “whether a borrower may assert this right to rescind as an affirmative defense in a collection action brought by the lender more than three years after the consummation of the transaction.” 523 U.S. at 411, 118 S.Ct. at 1409.13 The Court held that TILA rescission rights could not be asserted more than three years after consummation of the 13 Eastern asserts that a TILA rescission claim is a compulsory counterclaim, which the Estebans failed to raise in the foreclosure proceeding. The Estebans contend that it is a permissive counterclaim and that the Albano court, discussed further in Section IV(D), infra, misread Hawai#i law regarding compulsory counterclaims. However, the Ninth Circuit in Albano did not characterize a TILA rescission claim as a compulsory counterclaim; instead, it deemed it a “defense that would have ineluctably precluded foreclosure if the Albanos’ claims are meritorious.” 244 F.3d at 1064. Under Hawai#i law, a counterclaim is compulsory if there is a logical relation between the original claim and the counterclaim—i.e., it arises out of the same aggregate of operative facts as the original claim. See Hawai#i Rules of Civil Procedure Rule 13(a). If a defendant fails to assert a compulsory counterclaim, he is precluded from asserting it against the plaintiff in a subsequent action. Booth v. Lewis, 8 Haw. App. 249, 252, 798 P.2d 447, 449 (1990). We decide this case on res judicata grounds, and do not decide whether a TILA rescission claim is a compulsory counterclaim, a permissive counterclaim, an affirmative defense, or some other type of defense. 16 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER transaction, but did not question the propriety of defensively asserting such rights, stating: “We respect Congress’s manifest intent by concluding that the Act permits no federal right to rescind, defensively or otherwise, after the 3-year period of § 1635(f) has run.” 523 U.S. at 415, 118 S.Ct. at 1413. After Beach, Hawai#i appellate decisions have also referred to the TILA rescission right as an affirmative defense. Hawaii Cmty. Fed. Credit Union v. Keka, 94 Hawai#i 213, 223, 11 P.3d 1, 11 (2000) (“[TILA] gives a borrower no express permission to assert the right of rescission as an affirmative defense after the expiration of the 3-year period.”); accord, Ocwen Fed. Bank, FSB v. Russell, 99 Hawai#i 173, 188, 53 P.3d 312, 326 (2002). Accordingly, TILA rescission rights could have been raised by the Estebans in the foreclosure case, whether as a counterclaim or as an affirmative or other defense. We hold that under Hawai#i res judicata principles, a debtor is prohibited from asserting alleged TILA violations in an attempt to rescind a residential mortgage transaction after a foreclosure judgment has become final, despite the rescission attempt being within the three-year time limit provided by TILA.14 14 In any event, as Eastern correctly asserts, the Estebans failed to appeal the July 22, 2010 Judgment of the U.S. District Court in their federal TILA case (Civ. No. 10-00234-HG-LEK). That decision is final and preclusive of the claim that the Estebans now contend warrants reversal of the circuit court’s judgment confirming sale of the Property. See Robi v. Five Platters, Inc., 838 F.2d 318, 327 (9th Cir. 1988) (holding that a final judgment of a (continued...) 17 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER D. The Ninth Circuit Correctly Construed the Effect of Controlling Hawai#i Law, and Other Cases Cited by the Estebans Are Distinguishable The circuit court relied on the Ninth Circuit’s decision in Albano, which it deemed persuasive. Based on our reasoning above, Albano properly concluded that under Hawai#i law, a final foreclosure judgment precludes a mortgagor from subsequently bringing a TILA rescission claim. 244 F.3d at 1064. In addition, cases from other jurisdictions are not controlling; and the cases cited by the Estebans are distinguishable. For example, the first two cases cited by the Estebans, Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354 (D. Ariz. 1989), and Laubach v. Fidelity Consumer Discount Co., 77 B.R. 483 (E.D. Pa. 1987), did not involve foreclosure proceedings; the courts simply held that a debtor’s right of rescission under TILA was not barred by an earlier action in which the borrower asserted a claim based on TILA disclosure violations. In re Apaydin, 201 B.R. 716 (E.D. Pa. 1996), is also distinguishable because it held that, under Pennsylvania law, a TILA claim could not be raised as a counterclaim in a mortgage foreclosure action; as discussed above, this contrasts with the import of our decisions in Pacific Concrete, 62 Haw. at 342, 614 P.2d at 941, and Ellis, 51 Haw. at 57, 451 P.2d at 823. Finally, In re (...continued) federal district court is final for purposes of res judicata even if an appeal is pending), cited in Wong v. Cayetano, 111 Hawai#i 462, 477, 143 P.3d 1, 16 (2006). 18 FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER Walker, 232 B.R. 725 (N.D. Ill. 1999), is factually distinguishable because the debtor retained an equitable redemption right after the state court entered its foreclosure judgment. The Estebans provide no other support for their contention that “nearly every federal District Court and every Bankruptcy Court that has examined that issue has held, contrary to the Albano panel, that the federal TILA rescission right survives a foreclosure judgment.” Therefore, we conclude that their argument is without merit.