Opinion ID: 2631202
Heading Depth: 2
Heading Rank: 1

Heading: macris's fraudulent transfer, successor liability, and alter ego claims

Text: ¶ 18 We first address Neways's argument that the court of appeals erred in its determination that Macris's claims for fraudulent transfer, successor liability, and alter ego are not barred by res judicata. ¶ 19 The doctrine of res judicata embraces two distinct branches: claim preclusion and issue preclusion. See Swainston v. Intermountain Health Care, 766 P.2d 1059, 1061 (Utah 1988). Claim preclusion involves the same parties or their privies and also the same cause of action, `and this precludes the relitigation of all issues that could have been litigated as well as those that were, in fact, litigated in the prior action.' Schaer v. State, 657 P.2d 1337, 1340 (Utah 1983) (quoting Searle Bros. v. Searle, 588 P.2d 689, 690 (Utah 1978)). Issue preclusion, on the other hand, ` arises from a different cause of action and prevents parties or their privies from relitigating facts and issues in the second suit that were fully litigated in the first suit.' Id. Therefore, while both branches of res judicata serve[] the important policy of preventing previously litigated issues from being relitigated, different rules govern each branch. Salt Lake City v. Silver Fork Pipeline Corp., 913 P.2d 731, 733 (Utah 1995) (citing Penrod v. Nu Creation Creme, Inc., 669 P.2d 873, 874-75 (Utah 1983)). Neways relies upon claim preclusion in arguing that Macris's claims in Macris II are barred by res judicata because they could and should have been included in the action against Images in Macris I. ¶ 20 In order for claim preclusion to bar a subsequent cause of action, a plaintiff must satisfy three requirements: First, both cases must involve the same parties or their privies. Second, the claim that is alleged to be barred must have been presented in the first suit or must be one that could and should have been raised in the first action. Third, the first suit must have resulted in a final judgment on the merits. Madsen v. Borthick, 769 P.2d 245, 247 (Utah 1988) (citing Penrod, 669 P.2d at 875; Bradshaw v. Kershaw, 627 P.2d 528, 531 (Utah 1981); Int'l Res. v. Dunfield, 599 P.2d 515, 516-17 (Utah 1979); Krofcheck v. Downey State Bank, 580 P.2d 243, 244 (Utah 1978); Belliston v. Texaco, Inc., 521 P.2d 379, 380 (Utah 1974); Nat'l Fin. Co. v. Daley, 14 Utah 2d 263, 265-66, 382 P.2d 405, 407 (1963); Wheadon v. Pearson, 14 Utah 2d 45, 47, 376 P.2d 946, 947-48 (1962)). All three elements must be present for claim preclusion to apply. See Madsen, 769 P.2d at 247. ¶ 21 In reference to the second element of the test outlined above, Neways argued before the court of appeals that Macris's claims for fraudulent transfer, successor liability, and alter ego should have been raised in Macris I because Macris knew of its claims against Neways before the trial in Macris I began and should therefore have amended its complaint in that action and asserted the claims now pursued in the present action. ¶ 22 The court of appeals rejected Neways's argument and held that the doctrine of claim preclusion did not require Macris to litigate its claims against Neways in Macris I because the facts giving rise to Macris's claims against Neways . . . arose after Macris filed its amended complaint against Images. Macris & Assocs. v. Neways, Inc., 1999 UT App. 230, ¶ 14, 986 P.2d 748. In so holding, the court of appeals adopted the rule that a party is required to include claims in an action for res judicata purposes only if those claims ... arose before the filing of the complaint in the first action. Id. at ¶ 9. ¶ 23 Neways now argues before this court that the court of appeals erred in adopting the above-mentioned test, and contends that this court should adopt an alternate res judicata test requiring joinder of all claims arising before entry of judgment where the plaintiff has sufficient notice and opportunity to join such claims. Neways contends that the res judicata test adopted by the court of appeals is inconsistent with this court's decision in Badger v. Badger, 69 Utah 293, 254 P. 784 (1927), and the Utah Rules of Civil Procedure. ¶ 24 Neways's reliance on Badger is misplaced. In Badger, the defendant twice petitioned the trial court for modification of a divorce decree. See Badger, 69 Utah at 296-97, 254 P. at 785-86. The defendant's first petition sought modification on the ground that the property settlement on which the decree was based was induced by the plaintiff's misrepresentations and omissions concerning his assets. See 69 Utah at 296-97, 254 P. at 785. The trial court modified the decree and ordered the plaintiff to pay the defendant an additional amount. See 69 Utah at 296, 254 P. at 785-86. Two weeks later, the defendant filed a second petition, alleging other misrepresentations that the plaintiff had originally made. See 69 Utah at 296-97, 254 P. at 786. The plaintiff moved to strike the second petition on res judicata grounds, claiming that the court's decision concerning the first petition barred relief on the second. See 69 Utah at 298-99, 254 P. at 786. The trial court granted the motion. See 69 Utah at 299, 254 P. at 786. On appeal, this court affirmed the trial court's dismissal of the defendant's second petition on res judicata grounds. In so holding, this court stated: It affirmatively is made to appear that at the time the first petition was filed for a modification of the decree of divorce the defendant knew the contents of said decree and that she was to receive no property except that actually awarded to her. . . . [T]he appellant had as much knowledge about the plaintiff's property and income at the time she filed her first petition as she had at the time she filed the [second] petition which was stricken. 69 Utah at 301, 254 P. at 787 (emphasis added). Accordingly, Badger is consistent with the rule that a plaintiff need only include claims in a suit for res judicata purposes if the plaintiff was aware of the facts upon which the later claims were based at the time the first suit was filed. ¶ 25 Equally misplaced is Neways's argument that the court of appeals' decision creates confusion between the Utah Rules of Civil Procedure and the doctrine of res judicata. According to Neways, the Utah Rules of Civil Procedure clearly establish an intent that pleadings . . . should be amended as additional facts and claims are discovered and a rule requiring amendment for res judicata purposes should therefore be adopted. While the Utah Rules of Civil Procedure do allow for the amendment of pleadings to add additional parties or claims for relief, they do not require it. See Utah R.Civ.P. 15(a) (A party may amend his pleading .... (emphasis added)); Utah R.Civ.P. 20(a) (All persons may be joined in one action as defendants .... (emphasis added)). Therefore, it is clear that the rule espoused by Neways, requiring that pleadings be amended for res judicata purposes as additional facts and claims are discovered, would be inconsistent with the Utah Rules of Civil Procedure. Accordingly, we affirm the court of appeals' adoption of the rule that a party is required to include claims in an action for res judicata purposes only if those claims arose before the filing of the complaint in the first action. ¶ 26 A number of states and federal courts in other jurisdictions addressing this issue have come to a similar conclusion, holding that parties are required to include claims in an action for res judicata purposes only if those claims arose before the filing of the complaint in the earlier action. See Maharaj v. Bankamerica Corp., 128 F.3d 94, 97 (2d Cir.1997); Computer Assocs. Int'l, Inc. v. Altai, Inc., 126 F.3d 365, 369-70 (2d Cir. 1997); Doe v. Allied Signal, Inc., 985 F.2d 908, 915 (7th Cir.1993); Manning v. City of Auburn, 953 F.2d 1355, 1360 (11th Cir.1992); Dillard v. Security Pacific Brokers, Inc., 835 F.2d 607, 609 (5th Cir.1988); Los Angeles Branch NAACP v. Los Angeles Unified Sch. Dist., 750 F.2d 731, 739 (9th Cir.1984); Andrews v. Wade & De Young, Inc., 950 P.2d 574, 576 (Alaska 1997); Bolte v. Aits, Inc., 60 Haw. 58, 587 P.2d 810, 813-14 (1978); Durrant v. Quality First Mktg., Inc., 127 Idaho 558, 903 P.2d 147, 149-50 (Ct.App.1995); Ben C. Jones & Co. v. Gammel Statesman Publ'g Co., 100 Tex. 320, 99 S.W. 701, 703 (1907). ¶ 27 Applying the test to the facts of this case, the court of appeals was correct in concluding that res judicata does not bar Macris's claims against Neways for fraudulent transfer, successor liability, and alter ego. The facts giving rise to Macris's claimsImages's transfer of its assets to Neways and Neways's subsequent takeover of Images's businessdid not arise until after the filing of the complaint in Macris I. Thus, Macris was not obligated to amend its complaint in Macris I to include the claims now pursued in the present action against Neways. ¶ 28 Moreover, for the doctrine of res judicata to preclude a subsequent cause of action, not only must the plaintiff have been aware of the cause of action at the time the first suit was commenced, but the cause of action in the present suit must be identical to the one brought in the prior suit. See Schaer, 657 P.2d at 1340 (` In order for res judicata to apply, both suits must involve the same parties or their privies and also the same cause of action . . . .' (quoting Searle Bros. v. Searle, 588 P.2d 689, 690 (Utah 1978))). In determining whether claims are identical for res judicata purposes, this court has focused on whether [t]he two causes of action rest on a different state of facts and evidence of a different kind or character is necessary to sustain the two causes of action. Schaer, 657 P.2d at 1340; see also 46 Am.Jur.2d Judgments § 534 (1994) (describing identity of facts or evidence test). Therefore, even if a plaintiff is aware of the factual basis of a suit at the filing of another suit, he or she is not obligated to bring all claims together if there is no identity of facts and evidence between the two claims. ¶ 29 Macris I arose out of the formation of a distributorship agreement between Macris and Images in August 1989 and Images's 1991 breach of that agreement. In Macris I, Macris and Images litigated whether an enforceable agreement existed between the parties, whether Images breached that Agreement, and the amount of damages that should be awarded for that breach. ¶ 30 In contrast, Macris II arose out of the formation of Neways in August 1992, the transfer by Images of its assets to Neways on September 1, 1992, three days before the original trial date in Macris I, and Neways's subsequent takeover of Images's multilevel marketing business. Macris based its claims in Macris II on the Utah Fraudulent Transfer Act and similar common law doctrines designed to protect creditors from the evasions of debtors. Specifically, Macris claimed that Images's transfer of its assets to Neways three days before the trial in Macris I was scheduled to begin was fraudulent and accomplished to limit the amount of damages available to Macris and to hinder Macris from collecting the obligation owed by Images. ¶ 31 Accordingly, it is clear that Macris's claims against Neways in Macris II rest upon a different set of facts, and evidence of a different kind or character is necessary to sustain the claims, than the breach of contract litigation that was the subject of Macris I. Therefore, even if Macris had known of the relevant facts of Macris II at the filing of Macris I and it did notit still would have been justified in not including its fraudulent transfer, successor liability, and alter ego claims in the first lawsuit.