A recent decision by the Supreme Court of California clarified a bedrock principle of contract law: Parties who are jointly and severally liable on an obligation may be sued in separate actions. The decision in DKN Holdings, LLC v. Faerber clarified that separate actions against multiple parties are permissible because joint and several liability does not implicate the claim preclusion doctrine. Although a breach of contract may constitute a single wrong, the plaintiff has separate breach of contract claims against each of the defendants alleged to be jointly and severally liable.
In order to understand the Court’s recent decision, one must understand joint and several liability as well as the claim preclusion. A joint and several contract is a contract that is made both separately with each promisor and jointly with all the promisors. Parties to a joint and several contract are thus bound jointly, so they are liable for the entire obligation, and severally, so each may be sued separately for the entire loss. This allows individual promisors to be sued for enforcement of a contract without joining all co-promisors.
The claim preclusion doctrine prevents re-litigation of the same cause of action in a second suit between the same parties or parties in privity with them. Claim preclusion arises if a second suit involves: (1) the same cause of action (2) between the same parties (3) after a final judgment on the merits in the first suit. If claim preclusion is established, it operates to bar re-litigation of the claim altogether.
The relationship of these two doctrines was at the center of DKN Holdings, LLC v. Faerber. In that case, DKN leased commercial space to three leasees. The lease provided that the leasees had “joint and several responsibility” to comply with the lease terms. One of the leasees sued DKN for breach of contract, among other causes of action. DKN cross-complained for rent and other monies due. All leasees were originally named in the cross-complaint, but only the plaintiff was served. The other two leasees were dismissed without being served. After a bench trial, the court rejected the plaintiff’s claims and awarded $2.8 million on DKN’s cross-complaint.
Before the statement of decision was filed, DKN sued the other remaining leasees in a separate action. One of those leasees demurred, arguing that, because DKN’s rights under the lease had been adjudicated in the previous action, the suit against the remaining leasees was barred by claim preclusion. The trial court sustained the demurrer, and the Court of Appeal affirmed.
On appeal, the Supreme Court of California held that claim preclusion did not apply. Because claim preclusion only bars repeated claims for the same relief between the same parties, a judgment in an action does not bar a judgment in a later action alleging the same claim of wrongdoing as long as the suits are against different parties. Only a satisfaction of the contractual obligation would bar DKN from suing the remaining leasees. Here, because the judgment from the first lawsuit had not been satisfied when the second suit was filed, the second suit was permissible.
The Court’s decision highlights the importance of understanding the application of the doctrines of claim preclusion, issue preclusion, and joint and several liability. It likewise demonstrates that even if a co-obligor on a contract is not joined in a first lawsuit, there is still a risk of liability in a subsequent action.