Daewoo Electronics America Inc. v. Opta Corp.

          Argued and Submitted December 16, 2016 San Francisco, California

         Appeal from the United States District Court for the Northern District of California D.C. No. 3:13-cv-01247-VC Vince G. Chhabria, District Judge, Presiding.

          Perry Clark (argued), Law Offices of Perry Clark, Palo Alto, California, for Plaintiff-Appellant.

          Laurence Sandell (argued) and Reece Nienstadt, Mei & Mark LLP, Washington, D.C., for Defendants-Appellees.

          Before: Jay S. Bybee and N. Randy Smith, Circuit Judges, and Leslie E. Kobayashi, ^[*] District Judge.

         SUMMARY^[**]

         Claim Preclusion

         The panel reversed the district court's dismissal of almost all of Daewoo Electronics America Inc.'s claims as barred by a prior judgment of the United States District Court for the District of New Jersey; and remanded for further proceedings.

         Daewoo brought this diversity action to recover unpaid debt from four entities affiliated with GoVideo for GoVideo's purchase of DVD players from Daewoo. Daewoo previously filed suit in New Jersey federal court seeking to enforce a guaranty agreement, and the court ruled against Daewoo.

         The panel held that the summary judgment ruling of the federal district court in New Jersey on Daewoo's prior breach of contract claim (based on the guaranty agreement) against Opta Corporation and TCL Industries Holdings Limited did not preclude Daewoo from bringing the present alter ego and successor liability claims against Opta and TCL Multimedia Technology Holding Limited.

         The panel held that because the claims in the present action and in the prior guaranty action did not arise from the same transaction or occurrence, New Jersey's version of traditional res judicata did not apply. The panel further held that although New Jersey's "entire controversy doctrine" may have prevented Daewoo from bringing the present claims in New Jersey, this procedural joinder rule did not bar the claims from being heard in the federal district court sitting in California. The panel concluded that the district court erred in ruling that the claims in the present action were precluded under New Jersey law.

         Judge Bybee dissented because the majority opinion erred in not applying New Jersey law just as New Jersey state courts would apply it. Judge Bybee would apply New Jersey's "entire controversy doctrine" which would bar Daewoo's claims, and affirm the district court's judgment.

          OPINION

          N.R. SMITH, Circuit Judge

         When it is necessary for a federal district court with diversity jurisdiction to determine the preclusive effect of a prior decision by a different federal district court sitting in diversity, the second court must apply preclusion principles according to the law of the initial court's state. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508-09 (2001). Under New Jersey's traditional res judicata doctrine, a claim asserting breach of a contractual guarantee of a third party's debt does not preclude later alter ego and successor liability claims to collect the debt directly from entities related to the debtor. Further, although New Jersey's procedural joinder rules may require such claims to be joined in a single action, New Jersey law declines to impose these rules on other courts. See Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 142 (3d Cir. 1999); Mortgagelinq Corp. v. Commonwealth Land Title Ins., 662 A.2d 536, 537, 540-42 (N.J. 1995). Because the district court failed to apply New Jersey law correctly, we reverse.

         I. BACKGROUND

         Underlying this case are the unpaid debts of GoVideo (a non-party) for the purchase of DVD players from Plaintiff-Appellant Daewoo Electronics America Inc. (Daewoo). Daewoo brought the present action to recover this debt from four entities affiliated with GoVideo: TCL Corporation (TCLC), TCL Industries Holdings Limited (TCLI), TCL Multimedia Technology Holding Limited (TCLM), and Opta Corporation (Opta).^[1]

         GoVideo operated a consumer electronics business in which it owned patents on electronics technology, bought DVD players from manufacturers (made pursuant to GoVideo's patents), and sold those players to third-party retailers. From October 2003 through April 2005, Daewoo manufactured DVD players that it sold to GoVideo on credit. Shortly after this arrangement began, (on December 4, 2003) Daewoo, TCLI, and Opta entered into a guaranty agreement.^[2]Under that agreement, TCLI and Opta guaranteed the payment of obligations to Daewoo up to $5 million for the products Daewoo shipped to GoVideo. The agreement provided that it was to "remain in force for the 12 month period from the date of [its] execution." The agreement also specified that it was governed by New Jersey law.

         During 2004 and 2005, GoVideo had substantial operating losses. As a result, beginning in late December 2004, GoVideo stopped paying for the DVD players it was receiving from Daewoo. As of June 2005, GoVideo owed Daewoo $7, 775, 670.98. In November 2005, GoVideo brought suit in the United States District Court for the District of New Jersey against Daewoo for breach of contract and other claims based on allegations that Daewoo manufactured defective products for GoVideo. Daewoo asserted counterclaims to collect the unpaid debts GoVideo owed for DVD players. In April 2007, after GoVideo had abandoned its claims, the district court entered default judgment on the counterclaims, awarding Daewoo $8, 385, 168.84 (the amount of the debt, plus interest).

         Unable to collect from GoVideo on this judgment, Daewoo filed suit in May 2008 against TCLI and Opta, in the United States District Court for the District of New Jersey, seeking to enforce the guaranty agreement. In August 2010, the district court granted Defendants' motion for summary judgment in the guaranty action. Applying New Jersey contract law, the court found that the effective date of the guaranty was December 4, 2003; that such date was "clear on [the] face" of the agreement; and that the guaranty expired by its terms on December 3, 2004, twelve months from that date. Because the default judgment against GoVideo arose from debt incurred starting on December 23, 2004-after the guaranty expired-the district court held that TCLI and Opta never had an obligation to pay this debt under the guaranty.

         In March 2013, Daewoo brought the present suit against Opta, TCLM, TCLC, and TCLI in the United States District Court for the Northern District of California, asserting California state law claims for (1) actual fraudulent transfer, (2) constructive fraudulent transfer, (3) alter ego liability, and (4) successor liability. Defendants moved to dismiss based on the res judicata effect of the guaranty action. Judge White from the Northern District of California rejected the res judicata argument, holding that the actions were not sufficiently related so as to arise from the same transaction or occurrence. Instead, these California claims for relief relied on entirely different facts. Daewoo later voluntarily dismissed its claims for fraudulent transfer.

         The case was reassigned to Judge Chhabria in April 2014. Shortly thereafter, Judge Chhabria sua sponte ordered the parties to brief "whether this lawsuit is barred in whole or in part under the doctrine of res judicata, " based on the summary judgment in the guaranty action. Defendants then moved, under Federal Rule of Civil Procedure 12(c), for judgment on the pleadings based on res judicata. In ruling on the motion, the district court found that most of the facts on which Daewoo bases its present claims were available to Daewoo during the period that the guaranty action was pending. Thus, the court held that, because Daewoo could have asserted the present claims at the same time it brought the prior action, Daewoo was barred from bringing those claims in the present action. Daewoo now appeals.

         II. STANDARD OF REVIEW

         We review de novo the district court's ruling on a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). Lyon v. Chase Bank USA, N.A., 656 F.3d 877, 883 (9th Cir. 2011). Dismissal under Rule 12(c) is warranted when, taking the allegations in the complaint as true, the moving party is entitled to judgment as a matter of law. Id. We also review "questions of choice of law" de novo, Paulsen v. CNF Inc., 559 F.3d 1061, 1072 (9th Cir. 2009), but review for clear error the "factual findings underlying [the] choice of law determination, " Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1187 (9th Cir. 2001).

         III. DISCUSSION

         In short, the summary judgment ruling of the federal district court in New Jersey on Daewoo's prior breach of contract claim (based on the guaranty agreement) against Opta and TCLI does not preclude Daewoo from bringing the present alter ego and successor liability claims against Opta and TCLM.^[3]

         Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001), provides the framework for our analysis.^[4]Under Semtek, "federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity." Id. at 508. However, in these circumstances, federal common law requires that we determine the preclusive effect of the prior decision by reference to the law of the state where the rendering federal diversity court sits.^[5]Id. Because we must determine the preclusive effect of the judgment in the guaranty action, rendered by the United States District Court for the District of New Jersey sitting with diversity jurisdiction, Semtek mandates that we turn to New Jersey state preclusion law.

         The parties do not dispute that we begin with New Jersey law for the preclusion question; they disagree as to how that law operates. Their arguments concern two state law doctrines: (1) New Jersey's version of traditional res judicata, and (2) New Jersey's "entire controversy doctrine." We address the application of each doctrine in turn.^[6]

         A. Res Judicata

         Because there is not substantial overlap of the facts material to proving, first, the breach of contract claim in the prior guaranty action and, second, the alter ego and successor liability claims in the present action, the two actions do not grow from the same transaction or occurrence, and res judicata does not apply. For res judicata to apply, "[(1)] the judgment relied upon must be valid, final and on the merits; [(2)] the parties in the two actions must be either identical or in privity with one another; and [(3)] the claims must grow out of the same transaction or occurrence." Olds v. Donnelly, 677 A.2d 238, 243 ( N.J.Super.Ct.App.Div. 1996), aff'd, 696 A.2d 633 (N.J. 1997). Only the third element is genuinely in dispute.

         Therefore, we turn to whether Daewoo's alter ego and successor liability claims grow out of the same transaction or occurrence as the claim on the guaranty contract. To answer that question, we must consider four factors:

(1) whether the acts complained of and the demand for relief are the same (that is, whether the wrong for which redress is sought is the same in both actions); (2) whether the theory of recovery is the same; (3) whether the witnesses and documents necessary at trial are the same (that is, whether the same evidence necessary to maintain the second action would have been sufficient to support the first); and (4) whether the material facts alleged are the same.

Culver v. Ins. Co. of N. Am., 559 A.2d 400, 405 (N.J. 1989) (internal citations omitted) (quoting United States v. Athlone Indus., Inc., 746 F.2d 977, 984 (3d Cir. 1984)). "[T]he focal points of [the] analysis are whether the acts complained of were the same, whether the material facts alleged in each suit were the same and whether the witnesses and documentation required to prove such allegations were the same." Athlone, 746 F.2d at 984.^[7]

         With respect to the first factor, Defendants' acts (of which Daewoo complained and for which Daewoo demanded corresponding relief) differed in each action. Although Daewoo's claims in both actions could have had the effect of satisfying part of the default judgment against GoVideo (as both district court judges in the present action acknowledged), the underlying bases giving Daewoo a right to bring each suit-the wrongs for which Daewoo sought redress-did not overlap.

         As Judge White observed, the prior suit was an action for "a breach of a guaranty contract." Daewoo's complaint in the prior action alleged that Defendants became liable to Daewoo under the contract for $5 million, that Daewoo demanded payment from Defendants, and that Defendants refused to pay. It was the breach of the guaranty-Defendants' refusal to fulfill their contractual obligation to pay $5 million-that was the wrong for which Daewoo sought relief. Although proof of this claim would require showing that GoVideo was in debt to Daewoo, the purpose of suing in the guaranty action would not have been to fulfill GoVideo's obligation to pay its debt. Instead, the suit would fulfill Defendants' independent contractual obligation under an agreement to which GoVideo was not a party. Conversely, Daewoo seeks redress in the present action for an obligation to pay a $7.75 million debt incurred by GoVideo that had nothing to do with the guaranty contract. Daewoo seeks to hold Defendants directly liable for GoVideo's unpaid debt, rather than for Defendants' independent obligation.

         The relief available for each cause of action further evidences the difference in the underlying wrongs. Defendants acknowledge that the amount of damages available under the two actions was substantially different. In the prior action, Daewoo could have recovered no more than Defendants' independent $5 million obligation under the guaranty. However, under the theories asserted in the present action, Daewoo could recover $7.75 million, because Defendants would be held directly liable for the full amount of GoVideo's debts. See Wady v. Provident Life & Accident Ins. Co. of Am., 216 F.Supp.2d 1060, 1066 (C.D. Cal. 2002). Because Daewoo brought each action to seek redress for different underlying conduct, and because the recovery available in each action was substantially different, this factor weighs against finding that the claims grew from the same transaction or occurrence.

         Second, the parties and both of the district court judges have acknowledged that the present action involves theories of recovery that are legally distinct from those asserted in the prior action. The guaranty action concerned liability under an express contract executed by the parties to the litigation and governed by New Jersey law. The present action seeks to hold Defendants directly liable for a third-party's debt under California actions of alter ego and successor liability, where Defendants would otherwise have no independent basis for that debt. While this factor does not carry as much weight as others in the analysis, see Athlone, 746 F.2d at 984, it nonetheless supports the conclusion that claims in the separate actions did not grow from a common transaction or occurrence.

         The third and fourth factors are intertwined and both weigh in Daewoo's favor, because there is not significant overlap between the material facts or the necessary evidence in each action. Daewoo argues that the claims asserted in the separate actions involve substantially different facts and evidence because the issues in the guaranty action concerned only formation and interpretation of the guaranty contract, which are irrelevant to the claims of alter ego and successor liability. Instead, Daewoo argues, the present action "focuses on the conduct of Defendants-Appellees in stripping GoVideo of its assets, " which occurred well after formation of the guaranty. Daewoo further contends that (although Opta was involved in both actions) none of the facts or evidence in the guaranty action would have related to TCLM, because TCLM was not a party to that case or to the guaranty agreement. Defendants argue that Daewoo demonstrated the substantial overlap between the two lawsuits by alleging several of the same facts in both actions. However, Defendants fail to explain why any of these common facts (and their supporting evidence) were material to the guaranty action. Judge Chhabria's analysis suffers the same flaw. As Judge White found, while some of the contextual background facts may overlap, "Daewoo's alter ego and successor liability claims nonetheless do not directly relate in substance to the ...