The following is a case update written by Jessica L. Bagdanov, a partner at BG Law LLP, analyzing a recent decision of interest:

SUMMARY

The California Supreme Court (the Court) recently analyzed the scope and breadth of privity in connection with a claim preclusion scenario, limiting the reasoning and holding of Castillo v. Glenair, Inc., 23 Cal. App. 5^th 262 (2018). Grande v Eisenhower Medical Center, 2022 WL 2349762 (Cal. June 30, 2022).

To view the opinion, click here.

FACTS

A temporary staffing agency (the Staffing Agency) placed nurse Lynn Grande to work at Eisenhower Medical Center (the Hospital) for approximately one week in 2012. Later, Ms. Grande joined a class action lawsuit against the Staffing Agency (the First Suit), alleging wage and hour violations during the time she worked at the Hospital. However, the putative class encompassed significantly more than just nurses previously placed at the Hospital; the class included “all persons who at any time from or after January 30, 2008 through April 8, 2014 were non-exempt nursing employees of [the Staffing Agency] employed in California.” The parties to the First Suit reached a stipulation and settlement agreement, which agreement included releases in favor of the Staffing Agency and any of its agents, and judgment was entered according to the settlement (the Judgment). The Hospital was not named as a released party, nor was it a party to the lawsuit or settlement agreement.

Thereafter, Ms. Grande filed a putative class action against the Hospital, claiming wage and hour violations during the brief period of time she worked there (the Second Suit). This putative class included any nonexempt employees of the Hospital placed by any staffing agency, not just the Staffing Agency at issue in the First Suit. The Hospital was joined in its defense by the Staffing Agency (under apparent contractual indemnification requirements), which filed a complaint in intervention. Together they sought declaratory relief, arguing that the prior releases granted in connection with the First Suit and Judgment should benefit the Hospital and that Ms. Grande was barred by claim preclusion from bringing the Second Suit.

The trial court determined that the Hospital was not in privity with the Staffing Agency and found that the releases previously granted to the Staffing Agency did not extend to the Hospital. A divided panel of the Court of Appeal affirmed, agreeing with the trial court that the Hospital was not in privity with the Staffing Agency. Thus, preclusion was not appropriate. The Court of Appeal also agreed that the releases granted in the settlement of the First Suit did not encompass the Hospital. In doing so, the Court of Appeal criticized the privity analysis contained in Castillo v. Glenair, Inc., 23 Cal. App. 5^th 262 (2018) (Castillo). Presiding Justice Ramirez dissented, stating that he would follow Castillo as a matter of stare decisis.

The California Supreme Court granted review, affirming the Court of Appeal decision that the Hospital would not receive the benefit of the settlement in the First Suit and concluding that Ms. Grande’s suit against the Hospital could proceed.

REASONING

In so ruling, the California Supreme Court initially agreed with the Court of Appeal that the scope of the settlement in the First Suit did not grant releases or any relief to the Hospital. Interestingly, the Court emphasized the fact that parties are often in control of the preclusive effect of their stipulated judgments. The Court confirmed that the parties to a contract are the master of its terms, and negotiated contractual terms, along with the parties’ intent, should control the preclusive effect of such an agreement and resulting judgment.

The Court then conducted a lengthy privity analysis, ultimately agreeing with the Court of Appeal that the Hospital and staffing agency were not in privity for preclusion purposes. In briefing, the Hospital relied heavily on the facts and ruling of Castillo, which was a similar case involving a staffing agency and hospital. That court held that “privity” looks to a third party’s relationship to the subject matter of the litigation—not the relationship between defending parties to the first and second action. In Castillo, the court held that a second action against a client was precluded by a prior settlement reached between an employee-plaintiff and a staffing agency who placed the employee at the client. In Grande, the Court expressly disagreed, finding that such a definition of privity would stretch “remarkably broadly” to potentially any contractual relationship.

The Court also addressed two other privity theories advanced by the Hospital, specifically that the Hospital was entitled to the benefit of the Judgment in the First Suit based on contractual indemnification and derivative liability rights. The Court rejected those theories, explaining that factual overlap in claims does not necessarily dispose of potentially overlapping judgments against different defendants. The Court noted that while an indemnitee is sometimes afforded the right to assert claim preclusion based on a judgment in favor of its indemnitor, that entirely depends on how the indemnitor was initially sued. Here, there was no evidence that Ms. Grande had any knowledge of an indemnitor-indemnitee relationship, nor was the Staffing Agency sued in that capacity in the first place. Indeed, in the First Suit, the Staffing Agency was sued regarding a broad range of circumstances—any non-exempt California employees of the Staffing Agency from 2008 through 2014. In short, both the Staffing Agency and Hospital had independent duties to comply with the Labor Code, and the Hospital would not obtain the benefit of claim preclusion to avoid liability to the putative class.

AUTHOR’S COMMENTS

Though Grande is not an insolvency case, the concepts of issue preclusion, claim preclusion, and privity regularly arise in bankruptcy cases, often in the context of a judgment creditor seeking summary judgment as to nondischargeability of debt under 11 U.S.C. § 523(a). These principles also arise in litigation scenarios involving chapter 7 trustees determining the preclusive effect of prior state court judgments or agreements on potential claims belonging to the bankruptcy estate, and typically the bankruptcy court looks to state law to determine the preclusive effect of state court judgments. See In re Plyam, 530 B.R. 456, 462 (B.A.P. 9^th Cir. 2015); 28 U.S.C. § 1738 (federal courts must give full faith and credit to state court judgments). Thus, privity is an oft-briefed area of bankruptcy litigation practice; keeping informed of updates on the law is an important exercise for insolvency practitioners. Especially for trustees who lack independent knowledge regarding pre-bankruptcy transactions, Grande will be critical to keep in mind when analyzing the potential preclusive effect of prepetition judgments.

This review was written by Jessica L. Bagdanov, a partner at BG Law LLP in Woodland Hills, California and a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.