In the recent ruling of DKN Holdings, LLC v. Wade Faerber (decided on July 13, 2015) the California Supreme Court helped clarify the meaning of joint and several liability holding. Parties that are jointly and severally liable on the same obligation can be sued in separate actions which are not barred by the doctrines of claim preclusion or issue preclusion.
The cause of action for this case arose from Caputo, Faerber, and Neel, three individuals who each signed a ten-year lease to operate a gym in a shopping center. Caputo later sued DKN, the landlord, for damages and rescission of the lease based on fraud, breach of contract, and other claims. DKN cross-complained for rent and other monies due under the lease. DKN won at a bench trial and was awarded over $2.8 million in damages. DKN then sued Faerber and Neel for breach of the lease.
Faerber demurred, arguing that, because the landlord’s rights under the lease was adjudicated in the first action, suit against him was barred by the rule against splitting a cause of action. In opposition, the landlord argued that separate actions are permitted against parties who are jointly and severally liable. The trial court sustained the demurrer without leave to amend and entered judgment for Faerber.
The Court of Appeals affirmed reasoning that a breach of contract invades a single primary right, that the landlord could not split its cause of action into multiple claims, and that although separate actions against joint and several obligors are permitted, a final judgment on the merits in one action bars another action on the same claims.
The California Supreme Court then reversed the judgment, saying that the Court of Appeal erred in concluding that the judgment against Caputo barred DKN from obtaining judgments against Farber and Neel.
“The perceived conflict is a mirage. In reality, the res judicata, or preclusion, doctrine operates in harmony with joint and several liability principles because it only bars repeated claims for the same relief between the same parties,” said Justice Carol Corrigan in the decision.
Explaining further, the Court said that when multiple parties promise the same performance, Civil Code §§ 1659 and 1660 change the presumption from joint liability (the common law rule that required compulsory joinder) to joint and several liability (the statutory rule that gives the plaintiff the option to sue the multiple obligors in the same action or in separate actions). For purposes of issue or claim preclusion, joint and several obligors are not considered to be in privity because their joint and several liability alone does not create an identity or community of interest, and the liability of each joint and several obligor is separate and independent, not vicarious or derivative.
The opinion provides some much-needed clarity for lawyers representing parties exposed to joint and several liability claims.