This appeal involves California's application of the full faith and credit clause of the United States Constitution (U.S. Const., art. IV, § 1) to a Missouri state court judgment. Bound by that clause, we affirm the superior court's judgment dismissing the complaint of appellants R.C. and R.S. because the Missouri judgment barred their complaint.
Because this appeal is from a judgment sustaining a demurrer without leave to amend, we state the facts as alleged in appellants' complaint without passing on their veracity. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].) Registered domestic partners R.C. and R.S. maintained residences in California and Missouri. In 2004, they purchased health insurance policies issued by respondents PacifiCare Life and Health Insurance Company and Golden Rule Insurance Company (collectively Insurers). When applying for the policies, appellants disclosed that each of them was infected with HIV.
In June 2009 while Insurers' rescission action was pending, appellants dismissed without prejudice their breach of contract counterclaim. The next day, appellants filed in California state court their complaint against Insurers at issue in this appeal. The gist of their complaint alleged Insurers' failure to pay benefits damaged appellants' health because appellants could not afford to pay for the medication and health care they needed. Their complaint alleged causes of action for breach of contract; breach of the implied covenant of good faith and fair dealing for Insurers' unreasonable claims investigations and withholding of benefits; and unfair business practices in violation of Business and Professions Code section 17200 and Insurance Code section 790.03, subdivision (h).
Insurers moved to stay the California proceeding. They asserted the California complaint raised issues identical to those pending in their declaratory relief action in Missouri. Accordingly, they asked the California court to await the Missouri court's entry of judgment before proceeding with the California matter. The California court agreed.
In February 2010, the Missouri court entered judgment for appellants. Rejecting every one of Insurers' grounds for rescinding the insurance policies, the Missouri court found appellants had not defrauded Insurers. The Missouri court therefore ordered Insurers to pay appellants their full benefits under the policies, including benefits withheld in the past. Insurers accepted the Missouri judgment, and nothing in the record suggests they have violated the Missouri court's order.
Following entry of the Missouri judgment, the California court lifted its stay. Insurers thereafter demurred to appellants' California complaint. Insurers' demurrer argued that Missouri's compulsory counterclaim rule, which Insurers asserted California was obligated to apply under full faith and credit principles, barred appellants' lawsuit. Opposing the demurrer, appellants
The trial court sustained Insurers' demurrer without leave to amend. The court concluded constitutional mandates and California law directed the court to look to Missouri law to determine the consequences under Missouri's compulsory counterclaim rule of appellants not pursuing their counterclaims in the Missouri proceeding. The court stated: "Under both California Code of Civil Procedure § 1913 [(effect of sister state judgment)] and the Full Faith and Credit Clause of the United States Constitution, when determining the preclusive effect of a sister-state judgment, California courts measure that effect under the law of the state whose court rendered the judgment. Under the law of Missouri, the Missouri Judgment bars the claims advanced by [appellants] in the present action because they could have, and procedurally should have, been brought as counterclaims in the Missouri Action."
"`We treat [a] demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the [appellant]." (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.)
Appellants assert a sister state's designation of a cause of action as a "compulsory counterclaim" is a procedural matter not part of a court's judgment. (Cf. Shisler v. Sanfer Sports Cars, Inc. (2008) 167 Cal.App.4th 1, 10 [83 Cal.Rptr.3d 771] [acknowledging difference between "`substantive law which gives or declares the right'" and "procedural" law which governs how the right is enforced]; Richardson v. Walter Land Co. (1953) 118 Cal.App.2d 459, 464-465 [258 P.2d 42] [counterclaim statute is "procedural in character and simply denies a defendant relief in the designated circumstances. It does not wipe out or invalidate the obligation."].) Unembraced by the judgment, procedural matters, in appellants' estimation, lie beyond the reach of the full faith and credit clause. Instead, appellants conclude, the forum state—here, California—applies its own procedural law when enforcing a sister state judgment. Appellants cite case authority that "[i]t is well established that while the courts generally enforce the substantive rights created by the laws of other jurisdictions, the procedural matters are governed by the law of the forum [citations]. As defined in the case law, the terms `practice' and `procedure' include the mode of procedure by which a legal right is enforced as distinguished from" the substantive law which gives or declares the right. (World Wide Imports, Inc. v. Bartel (1983) 145 Cal.App.3d 1006, 1012 [193 Cal.Rptr. 830], fn. omitted (World Wide Imports).) Thus, the Missouri court's declaration of appellants' and Insurers' rights and obligations under the insurance policies is, according to appellants, a judgment entitled to full faith and credit, but Missouri's procedural rule governing when counterclaims must be asserted is not part of the judgment to which full
In support, appellants cite Van Pembrook v. Zero Manufacturing Co. (1985) 146 Mich.App. 87 [380 N.W.2d 60] (Van Pembrook), a decision in which the forum state—Michigan—onsidered application of Missouri's compulsory counterclaim rule to Michigan's enforcement of a Missouri judgment. Van Pembrook noted that the full faith and credit clause aims to stop a state from relitigating a matter already decided by a sister state. Van Pembrook further noted that Missouri's compulsory counterclaim rule seeks to avoid judicially inefficient piecemeal litigation of related claims. (See also Richardson v. Walter Land Co., supra, 118 Cal.App.2d at p. 464 [purpose of Cal.'s compulsory counterclaim rule "is to prevent piecemeal litigation"].) Van Pembrook explained: "The purpose behind the full faith and credit clause as applied to judicial proceedings is to avoid `relitigation in other states of adjudicated issues'. [Citation.] . . . [Citation.] The rationale behind the Missouri compulsory counterclaim rule is to avoid multiplicity of suits and to facilitate the proper and expeditious disposal of litigation. [Citation.] [Missouri's] local interest in judicial economy is separate and distinct from the national interest in avoiding the relitigation of adjudicated claims." (Van Pembrook, supra, 380 N.W.2d at p. 68.)
Van Pembrook's analysis of the different purposes of the full faith and credit clause and Missouri's compulsory counterclaim rule supports appellants here. First, a California trial of appellants' complaint alleging breach of contract, bad faith, and unfair business practices does not involve relitigating matters already heard by the Missouri court because the Missouri declaratory relief action tried only Insurers' entitlement to rescission based upon appellants' purported fraud and misrepresentation. Second, a California trial of appellants' complaint does not consume Missouri's judicial resources. If one's analysis went no further than Van Pembrook's policy insights, one
Pressing on, appellants additionally contend Missouri's counterclaim rule is akin to a statute of limitations, and it is well established that full faith and credit principles do not govern statutes of limitations. (Sun Oil Co. v. Wortman (1988) 486 U.S. 717, 721, 729, fn. 3 [100 L.Ed.2d 743, 108 S.Ct. 2117] [Kan. state court did not violate full faith and credit clause by applying Kan. statute of limitations to claims arising from, and substantively governed by, the laws of, Tex., Okla., and La.]; Matanuska Valley Lines, Inc. v. Molitor (9th Cir. 1966) 365 F.2d 358, 360 ["Application of the forum's statute of limitations entails no violation of the full faith and credit clause of the Constitution since such statutes are deemed to affect procedure only and not the substance of the action."]; Wells v. Simonds Abrasive Co. (1953) 345 U.S. 514, 516 [97 L.Ed. 1211, 73 S.Ct. 856].) Van Pembrook stamped a compulsory counterclaim rule as equivalent to a statute of limitations because both may dispose of a claim without litigating its merits. Van Pembrook explained: "Because it forfeits an unlitigated claim, Missouri's compulsory counterclaim rule is analogous to statutes of limitations, which are not ordinarily entitled to full faith and credit in foreign jurisdictions. [Citations.] For full faith and credit purposes, therefore, we find that Missouri's compulsory counterclaim rule is [not] an inherent part of the judgment. Therefore, full faith and credit does not compel the dismissal of the present claim." (Van Pembrook, supra, 380 N.W.2d at p. 68.)
We find appellants' contention that the full faith and credit clause does not apply to Missouri's compulsory counterclaim rule plausible, but ultimately not persuasive, for several reasons. First, the law favors expansive application of the full faith and credit clause in order to fulfill the clause's purpose of ensuring that all states within our federal system recognize each other's official acts, judicial actions, and judgments. The authorities supporting a broad reading are long-standing and numerous:
—Baker v. General Motors Corp. (1998) 522 U.S. 222, 232-233 [139 L.Ed.2d 580, 118 S.Ct. 657]: "Our precedent differentiates the credit owed to laws . . . and to judgments. `In numerous cases this Court has held that credit must be given to the judgment of another state although the forum would not be required to entertain the suit on which the judgment was
—Thomas v. Washington Gas Light Co. (1980) 448 U.S. 261, 270 [65 L.Ed.2d 757, 100 S.Ct. 2647]: "It has long been the law that `the judgment of a state court should have the same credit, validity, and effect, in every other court in the United States, which it had in the state where it was pronounced.' [Citations.]"
—Martin v. Martin (1970) 2 Cal.3d 752, 761, footnote 13 [87 Cal.Rptr. 526, 470 P.2d 662]: As a "general principle . . . the validity and effect of a judgment of a sister state are governed by the law of the state where the judgment was rendered."
—Gagnon Co. Inc. v. Nevada Desert Inn (1955) 45 Cal.2d 448, 453 [289 P.2d 466]: "Here we have a judgment (the Nevada judgment) of dismissal with prejudice, rendered by the court on a motion therefor by plaintiff. Whether such a judgment is a bar—res judicata—as to another action on the same cause in this state is controlled by Nevada law."
—Riley v. New York Trust Co. (1942) 315 U.S. 343, 349 [86 L.Ed. 885, 62 S.Ct. 608]: The full faith and credit "clause compels that controversies be stilled, so that, where a state court has jurisdiction of the parties and subject matter, its judgment controls in other states to the same extent as it does in the state where rendered."
—California's codification at Code of Civil Procedure section 1913 of the judgment portion of the full faith and credit clause states: "[T]he effect of a judicial record of a sister state is the same in this state as in the state where it was made . . . ."
Second, appellants' asserted distinction between procedural and substantive law in full faith and credit jurisprudence, in which counterclaims fall on the procedural side, does not overcome the expansive reading the law compels for the clause. The full faith and credit clause obligates California to enforce the Missouri judgment to the same effect as if Insurers sought the judgment's enforcement in Missouri. (See also Code Civ. Proc., § 1913.) Framing the
Examples abound of forum courts attaching little, if any, significance to the procedural-substantive distinction appellants urge for counterclaims. For example:
—R.G. Financial Corp. v. Vergara-Nunez (1st Cir. 2006) 446 F.3d 178, 182-185 held full faith and credit principles obligated a federal court to give a state court judgment the full effect the judgment would receive under the law of the state that rendered the judgment. In that case, the federal court applied the state court judgment to bar a foreclosed homeowner's claim for violation of lending laws because the homeowner did not pursue the violations as counterclaims in earlier foreclosure proceedings.
—In Noel v. Hall (9th Cir. 2003) 341 F.3d 1148, 1166-1167, the court rested on full faith and credit principles to apply a state's compulsory counterclaim law to bar a later action.
—In Conopco, Inc. v. Roll Internat. (2d Cir. 2000) 231 F.3d 82, 87-89, full faith and credit principles obligated a New York federal court sitting in diversity to apply California's compulsory counterclaim law to bar a counterclaim in a later action.
—Brinker v. Superior Court (1991) 235 Cal.App.3d 1296, 1300 [1 Cal.Rptr.2d 358] involved finality for res judicata of a New Jersey judgment in California. California requires that a judgment be final in order to have res judicata effect, but under California law a judgment for which the right to appeal exists is not final. In New Jersey, however, a judgment is final even if the right to appeal remains. Brinker concluded full faith and credit principles obligated California to honor the res judicata effect of a New Jersey judgment for which the right to appeal existed because it was final under New Jersey law. (See also Thorley v. Superior Court (1978) 78 Cal.App.3d 900, 906-907 [144 Cal.Rptr. 557] [Utah judgment res judicata in Cal. although right to appeal remained because Utah deemed judgment final for res judicata purposes].)
Appellants' reliance on Kahn v. Berman (1988) 198 Cal.App.3d 1499, 1505-1506 [244 Cal.Rptr. 575] for their substantive-procedural distinction is
Appellants contend Missouri's compulsory counterclaim rule did not apply to their California claims for bad faith, unfair business practices, and breach of the insurance policies because those claims did not exist when Insurers filed their Missouri complaint.
Appellants' contention is unavailing. The fact, rather than the amount or degree, of damages triggers a legal claim. (Lane v. Non-Teacher School
Appellants also contend their counterclaims were not compulsory because Insurers' declaratory relief action sought to terminate insurance benefits, whereas appellants sought recovery for damage to their health. Thus, according to appellants, Insurers' claims and their claims did not involve the same transaction, which the compulsory counterclaim rule requires. (Rule 55.32 [a counterclaim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim"].) In support of the narrow definition of "same transaction" that they urge, appellants cite Jack Brandt, Ltd. v. Morris (Mo. 1966) 400 S.W.2d 417 (Jack Brandt), a decision of questionable validity under current Missouri law. In Jack Brandt, a furniture seller sued a buyer to recover payment for furniture. The seller also sued to recover payment for interior decorating and construction services. The buyer countersued, alleging
Appellants' California claims and Insurers' Missouri claims arose from one set of insurance policies and are "logically related" (State ex rel. J.E. Dunn v. Schoenlaub, supra, 668 S.W.2d at p. 75): Insurers sought to rescind those policies; appellants sought to enforce them. Missouri law makes clear that the purpose of its compulsory counterclaim rule is "`to serve as "a means of bringing all logically related claims into a single litigation, through the penalty of precluding the later assertion of omitted claims."' [Citation.]" (Joel Bianco Kawasaki v. Meramec Valley Bank (Mo. 2002) 81 S.W.3d 528, 532, italics omitted.) Appellants' contention that Missouri's compulsory counterclaim rule does not apply here thus fails.
Beasley, supra, 877 S.W.2d 653 is instructive on Missouri's treatment of counterclaims in declaratory relief actions. Five homeowners in a several-hundred-house subdivision in Missouri filed a declaratory relief action challenging the levy of a special assessment on the homeowners by the subdivision's trustees. The trustees prevailed in the declaratory relief action when the Missouri court upheld the special assessment. (Id. at p. 654.) The subdivision thereafter imposed a new levy on the five homeowners to recover the subdivision's attorney's fees and costs incurred in the declaratory action. (Id. at p. 655.) The homeowners refused to pay the new levy and convinced a Missouri court to void it. Relying on Missouri's compulsory counterclaim rule, the Missouri court explained the trustees' claim for fees and costs arose under Missouri's compulsory counterclaim rule at the outset of the declaratory relief action and should have been sought in that proceeding, not in a later action. Rejecting the trustees' argument that the compulsory counterclaim rule did not apply because the trustees did not know at the beginning of the declaratory action how much the trustees would incur in attorney's fees and costs, the court explained: "The moment the trustees consulted attorneys to undertake the defense of the original declaratory judgment action, their claim for attorney's fees and expenses [under the subdivision's governing document] came into existence. [Missouri's compulsory counterclaim rule,] Rule 55.32(a) required that this claim be asserted at the time their pleading was served against [the homeowners]. The fact that the full amount of the fees and expenses could not be determined until the time of submission of the case for final decision does not render Rule 55.32(a) inapplicable. In any case where a party is entitled to recover attorney's fees, the claim for such recovery must be pleaded from the outset even though the amount of the
The judgment is affirmed. Each side to bear its own appellate costs.
Flier, J., and Grimes, J., concurred.