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Dan Ryan Builders, Inc. v. Crystal Ridge Development, Inc.

Supreme Court of West Virginia

June 8, 2017

DAN RYAN BUILDERS, INC., Third-Party Plaintiff Below, Petitioner
v.
CRYSTAL RIDGE DEVELOPMENT, INC., LANG BROTHERS, INC., AND ROBERT S. LANG, Third-Party Defendants Below, Respondents ANDDAN RYAN BUILDERS, INC., Third-Party Plaintiff Below, Petitioner,
v.
HORNER BROTHERS ENGINEERS, Third-Party Defendant Below, Respondent.

          Submitted: April 18, 2017

         Appeal from the Circuit Court of Harrison County The Honorable John Lewis Marks, Jr., Judge Civil Action No. 09-C-57

          Avrum Levicoff, Esq. Julie A. Brennan, Esq. The Levicoff Law Firm, P.C. Pittsburgh, Pennsylvania Counsel for the Petitioner

          Tiffany R. Durst, Esq. Nathaniel D. Griffith, Esq. Pullin, Fowler, Flanagan, Brown & Poe, PLLC Morgantown, West Virginia Counsel for Respondents Crystal Ridge Development, Inc.; Lang Brothers, Inc.; and Robert S. Lang

          Frank E. Simmerman, Jr., Esq. Chad L. Taylor, Esq. Frank E. Simmerman, III, Esq. Simmerman Law Office, PLLC Clarksburg, West Virginia Counsel for Respondent Horner Brothers Engineers

         SYLLABUS

         1. In a state court proceeding, federal rules of res judicata or claim preclusion dictate the preclusive effect of a federal court judgment on a federal question. However, for a federal court judgment applying state law, that state's rules of res judicata or claim preclusion dictate the preclusive effect of the judgment.

         2. "Before the prosecution of a lawsuit may be barred on the basis of res judicata, three elements must be satisfied. First, there must have been a final adjudication on the merits in the prior action by a court having jurisdiction of the proceedings. Second, the two actions must involve either the same parties or persons in privity with those same parties. Third, the cause of action identified for resolution in the subsequent proceeding either must be identical to the cause of action determined in the prior action or must be such that it could have been resolved, had it been presented, in the prior action." Syllabus Point 4, Blake v. Charleston Area Med. Ctr., Inc., 201 W.Va. 469, 498 S.E.2d 41 (1997).

         3. "For purposes of res judicata or claim preclusion, 'a cause of action' is the fact or facts which establish or give rise to a right of action, the existence of which affords a party a right to judicial relief The test to determine if the issue or cause of action involved in the two suits is identical is to inquire whether the same evidence would support both actions or issues. If the two cases require substantially different evidence to sustain them, the second cannot be said to be the same cause of action and barred by res judicata." Syllabus Point 4, Slider v. State Farm Mut. Auto. Ins. Co., 210 W.Va. 476, 557 S.E.2d 883 (2001).

          OPINION

          Ketchum, Justice

         In these consolidated appeals from the Circuit Court of Harrison County, we examine the res judicata effect of a federal court judgment on a state court third-party complaint. The circuit court found that the federal court case involved the same parties as those in the third-party complaint; the third-party complaint was based on the same evidence as the action litigated in federal court; and the final federal court judgment resolved the merits of the parties' disputes. The circuit court therefore dismissed the third-party complaint on res judicata grounds.

         As we discuss below, we affirm the circuit court's ruling.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         This case arises out of the construction of a residential community called "Crystal Ridge" on an empty 70-acre tract in Harrison County, West Virginia. The family of Robert S. Lang owned the tract, and in 2005, Mr. Lang transferred ownership to a family company, Crystal Ridge Development, Inc. Mr. Lang anticipated that excavation, grading and construction of the housing lots and the infrastructure - the roads, drainage culverts, utilities and such - would be done by the family construction business, Lang Brothers, Inc. We refer to Mr. Lang, Lang Brothers, and Crystal Ridge Development singularly as "the Lang Defendants."

         The Lang Defendants retained Horner Brothers Engineers to design the infrastructure for the housing subdivision. Because the land had steep slopes, Horner Brothers also designed the contour of the landscape. The parties planned to create 143 single-family house lots.

         On June 30, 2005, the Lang Defendants entered into a "Lot Purchase Agreement" with Dan Ryan Builders, Inc. ("Dan Ryan").[1] The Agreement allowed Dan Ryan to buy individual lots, as many as 143, in the Crystal Ridge subdivision. The Lot Purchase Agreement specified that the Lang Defendants would grade and contour the lots for construction and would build the infrastructure, while Dan Ryan would construct and sell the houses it built on the lots. Grading and construction on Phase I of the subdivision, comprising Lots 1-50, began in fall of 2005.

         The main road built through Crystal Ridge was Emerald Drive. To one side of Emerald Drive was a steep upward slope; to the other was a steep downward slope. To create usable lots on the downward slope (including Lots 1 through 7), on April 4, 2006, Dan Ryan and the Lang Defendants entered into a second agreement, titled "Contract With Independent Contractor." Under the agreement, for a fee, the Lang Defendants removed dirt and rock from one part of Crystal Ridge, and then contoured and constructed that material into a massive "fill slope" downhill from Emerald Drive. The Lang Defendants say they moved materials according to engineering plans drawn by Horner Brothers.[2]

         Dan Ryan and the Lang Defendants entered into a third contract, the "Trade Contract, " on June 2, 2006, whereby the Lang Defendants agreed to perform excavation, dampproofing, and backfilling for the foundations of houses to be constructed.

         In August 2006, Dan Ryan purchased its first 12 contiguous finished lots in Crystal Ridge pursuant to the Lot Purchase Agreement. Almost immediately, Dan Ryan began selling the 12 lots and then constructing single-family homes thereon for the purchasers. Dan Ryan purchased another five contiguous lots in January 2007. In May 2007, Dan Ryan and the Lang Defendants signed a fourth contract, the "First Amendment to Lot Purchase Agreement" that, among other things, changed the lot price in return for Dan Ryan's purchase of the final batch of 33 lots.

         By March 2007, it appears that the fill slope behind Lots 1 through 7 began to move. In December 2007, the fill slope behind Lot 7 moved significantly, dropping three feet, opening large fissures in the ground, and compromising the integrity of the single-family house built on Lot 7. Dan Ryan repurchased the lot from the homeowner and demolished the house. Thereafter, Dan Ryan began to reconstruct the entire fill slope.

         A. The State Court Case On February 2, 2009, numerous Crystal Ridge homeowners filed a lawsuit against Dan Ryan in the Circuit Court of Harrison County.[3] The named homeowners had all purchased a lot with a single-family house financed and constructed by Dan Ryan. The state court complaint also sought class-action status for all lot and house purchasers in Crystal Ridge. The plaintiff-homeowners alleged that in constructing the Crystal Ridge development, Dan Ryan had

excavated, graded and removed and/or moved soil, rock, timber, vegetation and other materials, . . . installed underground utility and water lines, and constructed roads and drainage culverts, all of which should have required careful planning, research, study, supervision and the investment of adequate capital and resources.

         The homeowners further alleged in their complaint that Dan Ryan had "caused or substantially contributed to a portion of the Crystal Ridge Development to subside, fall away or slip damaging the Plaintiffs' lots and land and the Development as a whole and forcing the demolition of at least one newly built home in the Development to date." The homeowners' complaint contends that Dan Ryan "failed to maintain sufficient support for the soil" and "improperly altered the flow of water" in Crystal Ridge, causing subsidence or the "loss of lateral and subjacent support" necessary to support houses on the tract.

         Based on these allegations, the homeowners asserted various legal theories for relief including negligence, breach of warranty, fraudulent misrepresentation, and vicarious liability. The homeowners contended that Dan Ryan failed to "exercise reasonable care in planning, construction, excavation, [and] site development" of Crystal Ridge, and that Dan Ryan failed to "supervise" or "make a proper and reasonable inspection" of work done by others.

         In their initial complaint, and likewise in three subsequent amendments to that complaint, the plaintiff-homeowners never asserted any claims against the Lang Defendants or Horner Brothers.

         Furthermore, at this point in the state court case, Dan Ryan also did not assert any claims against the Lang Defendants or Horner Brothers, specifically by way of a third-party complaint alleging they were liable for part or all of the homeowner's claims. Instead, Dan Ryan filed a civil case in federal court against the Lang Defendants.

         B. The Federal Court Case

         Ten months after the homeowners filed the state court case, on December 8, 2009, Dan Ryan filed a new lawsuit against the three Lang Defendants in the United States District Court for the Northern District of West Virginia.[4] The complaint was based on the federal court's diversity jurisdiction.5 The federal court complaint also centered upon the Crystal Ridge subdivision and generally alleged that the Lang Defendants were responsible for the same actions at issue in the state court case, including:

the development of various designs and plans for construction of Subdivision infrastructure . . . including, but not limited to: clearing and establishing grades on lots . . . mass site grading; on-lot fill compaction; . . . design and construction of storm water and sewer management systems; roadway curb and gutter installation; roadway paving installation; certain landscaping installation; certain street element installation; and certain utility installation.

         Count I of Dan Ryan's complaint asserted a cause of action for negligence. It asserted that the Lang Defendants failed to act with reasonable care in the "placement of fill and compaction of fill material under Subdivision lots, " the "installation of roadways and gutters, " the "installation of storm water and sewer systems, " and the "installation of utilities." The complaint alleged the Lang Defendants were negligent because they "deviat[ed] from original, approved construction designs and plans when performing excavation work[.]" As evidence of the Lang Defendants' duties - duties that were breached in negligence - Dan Ryan cited to the obligations established in the Lot Purchase Agreement; the Trade Contract; and the First Amendment to the Lot Purchase Agreement.[6]

         Count II of Dan Ryan's complaint alleged breach of contract (including for "negligently performing the construction activities"). Dan Ryan asserted the Lang Defendants breached the same contracts, and the same obligations, set forth in the negligence count, Count I.[7]

         Finally, the initial complaint that Dan Ryan filed in federal court included a count seeking "Defense and Indemnification." Dan Ryan asserted in Count IV that homeowners had named it as a defendant in the aforementioned civil action in state court. Dan Ryan contended that the plaintiff-homeowners in the state court action were alleging damages "that arise from and are a direct and proximate result of [the Lang] Defendants' negligence as alleged in Count I" of Dan Ryan's complaint. Dan Ryan's initial complaint demanded the Lang Defendants provide both a defense and "indemnification and/or contribution for any damages awarded for plaintiffs" in the state court action.

         The Lang Defendants moved to dismiss Dan Ryan's federal court lawsuit. The Lang Defendants argued, pursuant to the Colorado River abstention doctrine, that the complaint should be dismissed because a pre-existing parallel suit was pending in state court.[8] Under Colorado River, "Suits are parallel if substantially the same parties litigate substantially the same issues in different forums."[9] Dan Ryan responded that Colorado River did not apply by arguing that the Lang Defendants were not named parties in the state court action. However, despite Dan Ryan's response, the federal judge expressed an inclination to dismiss part or all of Dan Ryan's federal complaint because of the indemnification-contribution-defense count. The federal judge stated:

         [A]t the end of the day, Count 4 is where I'm focused because I think your whole effort to litigate this thing in federal court collapses on Count 4. You brought it in here specifically seeking defense and indemnification for the state case from Lang Brothers and that - that is not something I'm going to rule on.

         Now if you want to go back and amend your complaint and get that out and seek defense and indemnification over in state court by way of third party, I don't know, but if this is in here, here's what you're going to get from me. Either I'm going to grant the motion to dismiss as to that particular count, if I can do it and I don't know if I can or if I have to dismiss the whole thing, I'm going to stay the whole thing until the state court action's over because of the defense and indemnification issue.

         After the hearing, Dan Ryan amended its federal court complaint and removed Count IV. Following the amendment, the federal court refused to dismiss the case and proceeded to exercise jurisdiction.

         Thereafter, the Lang Defendants filed a third-party complaint in federal court against Horner Brothers. The Lang Defendants asserted, because Dan Ryan's complaint implicated the engineering work of Horner Brothers in the development and construction of Crystal Ridge, that Horner Brothers should be liable under theories of implied indemnity, contribution, and breach of contract.

         C. Dan Ryan's Third-Party Claim in State Court

         In March of 2012 - nearly two years after voluntarily dismissing its federal court claims for contribution and indemnification, and nearly three years after the homeowners filed their lawsuit against Dan Ryan - Dan Ryan filed a third-party complaint in the homeowners' state court case. This third-party complaint - the pleading at the heart of this appeal - was against the Lang Defendants and Horner Brothers.[10] Dan Ryan alleged that the Lang Defendants and Horner Brothers were responsible for the design, engineering, and construction of the fill slope that the homeowners alleged to be defective. The third-party complaint specifies that the Lang Defendants' duties in the subdivision were set forth in three contracts: the Lot Purchase Agreement; the Contract With Independent Contractor; and the Trade Contract.[11] Dan Ryan's third-party complaint sought common-law contribution for negligence, contractual contribution, and damages for breach of contract.

         The Lang Defendants and Horner Brothers answered the third-party complaint. Shortly thereafter, the state court entered an order preventing the parties from conducting discovery against the Lang Defendants or Horner Brothers until the conclusion of federal court proceedings.

         D. The Federal Court Trial

         In August 2012, the federal court conducted a bench trial on Dan Ryan's breach of contract and negligence theories, and issued a 90-page decision on September 24, 2013.[12] The federal court found that Dan Ryan alleged various obligations and duties owed by the Lang Defendants, obligations which arose from several contracts. Much of the federal court's discussion centered upon the Lang Defendants' duty to construct the fill slope downhill of Emerald Drive. The federal court's decision extensively details the trial evidence showing that the "fill slope placed by [the Lang Defendants] on top of the preexisting slope had been poorly constructed, creating an unstable fill embankment."[13]Expert evidence presented at trial by Dan Ryan noted the "poor construction practices" by the Lang Defendants, including "over-steepened slope faces, . . . inadequate drainage, lack of proper benching, and uncontrolled fill placement and compaction[.]"[14]

         At trial, to the extent Dan Ryan based its case on the various contracts between the parties, the federal court found Dan Ryan had narrowed its case down to four specific breaches of contracts by the Lang Defendants. The federal court, however, concluded Dan Ryan had failed to prove all but one of those breaches. For instance, the federal court found, "While there is a significant dispute in this case about whether [the Lang Defendants] properly constructed the fill slope, there is no dispute that [the Lang Defendants] completed the grading work and was paid in full by [Dan Ryan Builders]."[15]In other words, Dan Ryan failed to show the breach of any contract because the evidence established the Lang Defendants had in fact, constructed the fill slope and Dan Ryan had not introduced any compelling evidence to show it was done improperly.

         The federal court found the Lang Defendants breached only one of its duties under one contract: an agreement to patch roadways and repair curbs. The federal court's order awarded Dan Ryan $175, 646.24 in damages (plus another $77, 615.24 in pre-judgment interest) against the Lang Defendants.

         As for Dan Ryan's theory that the Lang Defendants were negligent, the federal court found that claim entangled with the contract claims and barred by the "gist of the action" doctrine. At trial, Dan Ryan alleged that the Lang Defendants' "negligence caused (1) the failure of the fill embankment along Lots 2 through 7, (2) the failure of the cut slope behind Lots 15 through 17, (3) compaction issues on other lots; and (4) issues with 'bad soil' on Lot 10."[16]

         However, a negligence action requires a plaintiff to show a defendant breached a duty of care. The gist-of-the-action doctrine is triggered when the asserted duty of care derives, in fact, from a contract:

If the action is not maintainable without pleading and proving the contract, where the gist of the action is the breach of the contract, either by malfeasance or nonfeasance, it is, in substance, an action on the contract, whatever may be the form of the pleading.[17]

         Under this doctrine, "recovery in tort will be barred" when any of the following factors are demonstrated:

(1) where liability arises solely from the contractual relationship between the parties; (2) when the alleged duties breached were grounded in the contract itself; (3) where any liability stems from the contract; and (4) when the tort claim essentially duplicates the breach of contract claim or where the success of ...

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