This week's opinion of the week is Germain Real Estate Company, LLC v. HCH Toyota, LLC, __ F.3d __ (8th Cir. Feb. 6, 2015), which offers a useful perspective on the interplay between collateral estoppel among federal and state courts.
The plaintiff sued in Arkansas state court for specific performance of a purchase option in a lease. The state court dismissed the action for failure to state a claim. Although the dismissal was without prejudice, the plaintiff neither appealed nor filed an amended complaint. Rather, the plaintiff filed a diversity action in federal court, again seeking specific performance, while also asserting various tort claims predicated on the breach of the lease option.
The Western District of Arkansas dismissed the action based on issue preclusion (collateral estoppel), and the Eighth Circuit affirmed in a published opinion. Applying the Full Faith and Credit Act, 28 U.S.C. § 1738, the state court judgment was entitled to the same preclusive effect that the state court would give that judgment. Arkansas appellate courts had not addressed the preclusive effect of a dismissal without prejudice for failure to state a claim. Looking to section 13 of the Restatement (Second) of Judgments to predict Arkansas law, the Eighth Circuit held:
Although the state-court action was dismissed without prejudice, the state-court judgment was sufficiently firm to be accorded conclusive effect. As set forth above, the parties submitted briefs and oral argument to the state court. The order of
dismissal was short, but the oral argument transcripts make clear that the parties were
fully heard and the court was familiar with the relevant provisions set forth in the
lease agreement, the assignment and third amendment, and the subordination
agreement. Moreover, even though the case was dismissed without prejudice, plaintiff could have appealed from the judgment.
Thus, the district court was correct to dismiss the complaint, all counts of which were inconsistent with the issues that the state court judgment settled.