Weddell v. Sharp (Nev. Supreme Ct. – May 28, 2015)

The Nevada Supreme Court adopted the doctrine of nonmutual claim preclusion, meaning that a defendant may validly use claim preclusion as a defense by demonstrating that (1) there has been a valid, final judgment in a previous action; (2) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first action; and (3) privity exists between the new defendant and the previous defendant or the defendant can demonstrate that he or she should have been included as a defendant in the earlier suit and the plaintiff cannot provide a good reason for failing to include the new defendant in the previous action.

Weddell and Stewart were former business partners who were engaged in multiple business ventures. Through time, several disputes arose between the partners regarding their business dealings. The partners agreed to informally settle their disputes by presenting them to a panel of three attorneys (attorneys). Because the attorneys had previous dealings with Weddell and Stewart, both Weddell and Stewart signed a Memorandum of Understanding in which they acknowledged the potential for conflicts of interest, waived those potential conflicts, recognized that the attorneys would be neutral in the dispute-resolution process, and agreed that the decision rendered by the attorneys would be binding, non-appealable and could be judicially enforced.

The Memorandum of Understanding did not specify the process by which the attorneys would go about rendering their decision, and the record did not clearly reflect the process that was actually taken. In any event, the attorneys issued a decision resolving the partners’ disputes that, for the most part, was favorable to Stewart. Stewart then filed a lawsuit against Weddell, seeking a declaratory judgment that the attorneys’ decision was valid and enforceable. Weddell filed an answer and counterclaim to Stewart’s complaint in which he asked the district court to enforce only the portion of the attorneys’ decision that was favorable to him. In support of his requested relief, Weddell questioned the attorneys’ neutrality in rendering their decision, specifically alleging that the attorneys had failed to answer certain questions that Weddell had wanted answered, that the attorneys had concealed pertinent facts from each other, and that the attorneys had concealed from Weddell their knowledge that Stewart had defrauded Weddell. Weddell, however, did not assert cross-claims against any of the attorneys. During the first day of a bench trial, appellant.

During the first day of a bench trial, Weddell informed the district court that he would enter a confession of judgment acknowledging that the attorneys’ decision was, indeed, valid and enforceable against him in its entirety. Weddell proceeded to confess judgment and stipulated to dismiss his counterclaim. Over two years later, however, Weddell instituted an action against the attorneys in which he asserted causes of action stemming from the attorneys’ conduct in the dispute-resolution process. The attorneys filed a motion to dismiss the complaint and requested attorney fees as sanctions, contending that, among other reasons, dismissal was warranted on claim preclusion principles and that Weddell had filed the complaint without reasonable grounds, warranting sanctions under NRS 18.010(2)(b). The district court granted the attorneys’ motion to dismiss, finding that the three factors for claim preclusion articulated by the Nevada Supreme Court in Five Star Capital Corp. v. Ruby, 124 Nev. 1048, 194 P.3d 709 (2008), had been satisfied. The district court also entered a subsequent order granting the request for attorney fees. Weddell appealed both orders.

Five Star modified the previous four-factor test for when claim preclusion could be asserted as a valid defense in favor of the following three-factor test, which was the test that the district court in this case employed: (1) the parties or their privies are the same, (2) the final judgment is valid, and (3) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first case.

Weddell’s primary argument was that the district court erroneously found the first factor to have been satisfied—i.e., that the attorneys were in privity with Stewart, the defendant against whom Weddell asserted his counterclaim in Stewart’s declaratory relief action. In so finding, the district court ruled that the attorneys were sufficiently in privity with Stewart because Stewart played a role in selecting the attorneys as the panel members and because both Stewart and the attorneys had an interest in upholding the attorneys’ dispute-resolution decision. The Nevada Supreme Court agreed with Weddell that this relationship between the attorneys and Stewart did not fall within this court’s previously used definition of privity, which recognizes that one person is in privity with another if the person had acquired an interest in the subject matter affected by the judgment through. . . one of the parties, as by inheritance, succession, or purchase.

Thus, contrary to the district court’s determination, the Court concluded that privity did not exist between the attorneys and Stewart and that Five Star’s test for claim preclusion was not satisfied in this instance. The Court believed that this conclusion, however, revealed that Five Star’s test for claim preclusion did not fully cover the important principles of finality and judicial economy that it intended to capture.

Specifically, Weddell’s causes of action against the attorneys in the underlying action and his counterclaim against Stewart in the previous declaratory relief action were premised on the same alleged facts: that the attorneys and Stewart loosely colluded with one another to render a dispute resolution decision unfavorable to Weddell. Given these circumstances, Five Star’s third requirement that the subsequent action be based on the same claims or any part of them that were or could have been brought in the first case would be satisfied. Thus, but for Five Star’s privity requirement, Weddell’s causes of action against the attorneys would be barred by claim preclusion.

Nonmutual claim preclusion

The concept of nonmutual claim preclusion embraces the idea that a plaintiff’s second suit against a new party should be precluded if the new party can show good reasons why he should have been joined in the first action and the plaintiff cannot show any good reasons to justify a second chance.

Thus, the doctrine of nonmutual claim preclusion is designed to obtain finality and promote judicial economy in situations where the civil procedure rules governing noncompulsory joinder, permissive counterclaims, and permissive cross-claims fall short. The purpose of nonmutual claim preclusion, then, is the same as that of claim preclusion in general: to obtain finality by preventing a party from filing another suit that is based on the same set of facts that were present in the initial suit

The Court explained that there was a valid final judgment in the declaratory relief action between Weddell and Stewart. Weddell’s claims against the attorneys in this lawsuit were premised on the attorneys’ alleged collusion with Stewart in the dispute-resolution process. Because Stewart’s declaratory relief action sought a judicial determination that the dispute-resolution decision was valid and enforceable, and because Weddell’s counterclaim against Stewart sought the opposite, Weddell’s current claims against the attorneys clearly could have been brought in that case. Therefore, the Court focused on whether Weddell had shown a good reason to justify this second lawsuit. Further, the allegations in Weddell’s answer and counterclaim in the declaratory relief action formed the basis for his causes of action against the attorneys in the underlying action, which was filed two years later.

Consequently, the Court concluded that Weddell lacked a good reason for not asserting his claims against the attorneys in Stewart’s declaratory relief action. Therefore, the Court affirmed the district court’s dismissal of Weddell’s complaint on the ground that it was barred by claim preclusion.