Commercial Division Blog

Posted: October 6, 2014 / Categories Commercial, Res Judicata/Collateral Estoppel/Entire Controversy Doctrine

When Summary Judgment Decision Provides for Right to Assert New Causes of Action, Res Judicata Does Not Bar Assertion of Those Claims

On September 18, 2014, Justice Scheinkman of the Westchester County Commercial Division issued a decision in MBIA Ins. Corp. v. J.P.Morgan Sec. LLC, 2014 NY Slip Op. 51424(U), ruling that a prior order granting summary judgment to the defendant did not preclude the defendant from filing an amended complaint asserting new claims, where the summary judgment order expressly granted the plaintiff leave to move to amend the complaint.

In MBIA Ins. Corp., the plaintiff, an insurer of a mortgage securitization transaction, filed an action to recover damages for fraud against Bear Sterns, the underwriter of the transaction. Justice Scheinkman granted summary judgment to Bear Sterns dismissing the sole claim asserted in the complaint. However, the Court found that there was evidence in the record "that would suggest considerable merit" to two unpled causes of action. Accordingly, the Court conditioned its grant of summary judgment on the "explicit provisio" that the plaintiff was granted leave to move to amend the complaint to assert the two previously unpled claims. Defendant Bear Sterns opposed the motion to amend on the ground that, notwithstanding the express permission in the summary judgment order for the motion to amend, any amendments were barred by the doctrine of res judicata, as a result of the court's granting summary judgment. Under New York's "transactional analysis" approach to res judicata, the dismissal of a claim on summary judgment generally bars the plaintiff from reasserting both the dismissed claim and "all other claims arising out of the same transaction or series of transactions . . . even if based upon different theories or if seeking a different remedy." O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981). Justice Scheinkman found that in this case, because the summary judgment order was expressly made "'without prejudice' to a motion by Plaintiff to interpose an Amended Complaint," the decision "left alive, and viable for later litigation, the two unpleaded causes of action." The Court explained:

There are numerous cases, including many from the Appellate Divisions, in which the courts have done what this Court did, i.e., grant summary judgment to the defendant on the pleaded cause of action but grant leave to the plaintiff to apply for leave to serve an amended Complaint. By pursing this course of action, whether to allow an amendment can be decided in light of the proposed pleading with both parties having a full and fair opportunity to address all relevant issues, including the issue of prejudice. In this regard, this Court was sensitive to the fact
that Bear Stearns' only opportunity to address the unpleaded claims in this case was in its reply papers and, therefore, may not have had a full opportunity to address the viability of the unpleaded claims and to address whether there would be cognizable prejudice to an amendment (that Plaintiff had not specifically requested).

To accept Defendant's res judicata contention, it would have to be concluded that the cited appellate authorities invited an idle, precluded application, particularly since in each of
them, as in this case, the courts, in granting summary judgment, recognized potentially viable claims and reserved them as fit subjects of continued litigation. Moreover, it would effectively penalize Plaintiff for the Court's decision to give Defendant the opportunity to be heard on the issue of the amendment, instead of the Court just having granted leave to amend sua sponte. Defendant's position would also render entirely superfluous the Court of Appeals' ruling in Alvord and Swift v. Stewart M. Muller Constr. Co., [46 N.Y.2d 276, 281 (1978)], which specifically endorsed the process of allowing an unpleaded claim, found meritorious on summary judgment, to be asserted via an amendment. This Court cannot conclude that these authorities
contemplated a doomed and idle exercise or that the distinguished judges who participated in the cited decisions, including the then Chief Judge who authorized the Alvord and Swift decision, were unmindful of res judicata principles.

In that regard, it is a recognized res judicata principle that it is inequitable to preclude a party from asserting a claim based res judicata where the court, in the first proceeding, expressly reserved the plaintiff's right to pursue a later or continued litigation. Here, the May 2014 Decision expressly reserved two unpleaded claims for future litigation and, as result, res judicata does not bar the Court from entertaining them. Stated another way, while the Court must give res judicata effect to its grant of summary judgment, it may not give it broader effect than its determination reflects. While the Court granted summary judgment to Defendant on the pleaded claim, and that claim is now precluded, the Court simultaneously reserved for future litigation the two unpleaded claims, which are, therefore, not precluded.

(Citations omitted.)