Annapolis Urban Renewal Authority v. Interlink, Inc.

Moore, J., delivered the opinion of the Court. This appeal involves the falling-out between the Annapolis Urban Renewal Authority (AURA) and Interlink, Incorporated, which was selected by AURA in December 1973 ²⁸⁷ as the developer of Parcel #15 of the Town Center Urban Renewal Area of the City of Annapolis. The project was designated as Martin Luther King Village. Under a contract with AURA, and in conformity with certain plans and specifications, Interlink undertook to construct 22 residential townhouses on the parcel.

Inevitably, disputes arose between the parties before the project was completed. In November 1974, to avoid a work stoppage, and “fight about it later on,” the parties entered into an “escrow agreement,” each contributing to a fund aggregating $7,948.10, 1 “pending the outcome of negotiations.” Counsel for AURA, Nicholas J. Fotos, Esq., was designated as “escrow agent.” Although he was not a party to the agreement, the instrument provided that the “escrow agent agrees not to disburse the funds without being so authorized by both parties... or in the event the. parties cannot agree, by order of Court or appropriate order by an arbitrator in the event the parties agree to arbitrate.” The escrow agreement — which has given rise to this appeal — apparently went into eclipse when the job was completed. Interlink sued AURA and the Mayor and Aldermen of the City of Annapolis on June 30, 1975 for damages in the amount of $100,000 for breach of contract. 2 Neither party made any reference to the escrow account in its pleadings. Eventually, AURA interposed a motion under Md. Rule 323 raising a preliminary objection — that of sovereign immunity.

The Circuit Court for Anne Arundel County (Beardmore, J.), on October 18, 1976, sustained the objection, finding that AURA was an “agency of the state performing a governmental function, and that defense has not been expressly or impliedly waived.” Judgment was entered for AURA, Interlink did not appeal. ²⁸⁸ It appears that AURA thereafter requested Interlink’s concurrence to the disbursement of the escrow money to AURA. Interlink refused. On May 19, 1977, AURA filed a declaratory judgment action, requesting that the Circuit Court for Anne Arundel County declare that it was entitled to the proceeds and interest held by the escrow agent. AURA alleged that the basis for the action was that “[t]he funds in the escrow account were part of the damages sought in [Interlink’s abortive breach of contract action] and as a result of the Court’s ruling and the expiration of the appeal time such damages cannot be recovered____” A motion for summary judgment, based on the theory of res judicata accompanied the declaration.

The lower court (Williams, J.) denied the motion. Interlink thereafter amended its plea and prayed a declaratory judgment that it was entitled to the escrow fund. At a subsequent court trial on the merits of the declaratory judgment action before Judge Williams, appellant called Mr. Fotos, the escrow agent, as its sole witness. Through him, it offered the record in the breach of contract action which had been dismissed by order of Judge Beardmore.

It was received and appellant rested. Interlink then called its president, Alexandria Crawford, who was followed to the stand by its vice-president, Ralph Crawford. Over AURA’s objection, Interlink was permitted to relitigate the issue of breach of the 1973 contract. The court allowed the Crawfords to testify concerning the terms of the contract, the failure of AURA to provide utilities in accordance with the agreement and to reimburse Interlink for certain change orders, as well as AURA’s liability under an adjustment clause of the contract for late delivery of each of three sections of the parcel of land under a settlement schedule annexed to the contract.

The damages to which they testified exceeded $16,000. At the close of all the evidence, AURA renewed its motion for summary judgment. Mr. Fotos pointed out to the court that he had not gone into a “meritorious defense” deliberately, although, he asserted, “We could prove they weren’t damaged at all.” He stated: “[T]his is a res judicata ²⁸⁹ situation____[W]e’re not asking the Court to apply the doctrine of sovereign immunity in this case, we’re asking the court now for res judicata.” In an oral opinion from the bench, followed by a written declaratory judgment order, Judge Williams rejected appellant’s contention that it was entitled to prevail on res judicata grounds. With respect to the merits of the declaratory judgment case, he then said: “[T]he Court certainly has heard sufficient evidence today to indicate that Interlink has valid claims against Annapolis' Urban Renewal Authority which must be considered before a disbursement of any of the escrow funds can be allowed by the Court.... [Tjhese claims total well in excess of the amount held in escrow so that the Court finds that the full amount held by the escrow agent could be paid to Interlink, Inc., and none of it should be returned to AURA. ” (Emphasis added.) Although on appeal AURA puts forth three separate contentions, they merge into one: that as a result of Judge Beardmore’s ruling in the breach of contract suit, AURA was entitled to prevail on res judicata grounds and it was error for the court below in the suit on the escrow agreement to allow evidence bearing upon the breach of the contract and to hold that Interlink was entitled to the escrow fund, plus interest.

I At the outset, we observe that for res judicata analysis, this case is unique. Usually the doctrine is raised by a defendant to defeat a second suit on the same cause of action initiated by the unsuccessful plaintiff in the first suit. Here, however, the defendant in the first suit, in seeking a declaratory judgment 3 as to its entitlement to the escrow account, used ²⁹⁰ the res judicata doctrine offensively when it rested its case on the prior judgment granted in its favor on grounds of sovereign immunity. This is indeed an unusual context in which res judicata is sought to be employed, but we do not find the situation untenable.

In Maryland and elsewhere, the doctrine of res judicata has been defined in myriad cases as: “[A final] judgment [on the merits] between the same parties and their privies is a final bar to any other suit upon the same cause of action, and is conclusive, not only as to all matters that have been decided in the original suit, but as to all matters which with propriety could have been litigated in the first suit, where the court had jurisdiction, proceedings were regular, and his omission was due to his own negligence.” Alvey v. Alvey, 225 Md. 386, 390 , 171 A.2d 92, 94 (1961). See Southland Corp. v. Shulman, 331 F. Supp. 1024, 1027 (D. Md. 1971); Maicobo Investment Corp. v. Von Der Heide, 243 F. Supp. 885, 890 (D. Md. 1965); Cook v. State, 281 Md. 665, 668-69 , 381 A.2d 671, 673 (1978); MPC, Inc. v. Kenny, 279 Md. 29, 32 , 367 A.2d 486, 488-89 (1977); Missler v. Anne Arundel County, 271 Md. 70, 77 , 314 A.2d 451, 456 (1974); Shoreham Developers, Inc. v. Randolph Hills, Inc., 269 Md. 291, 302 , 305 A.2d 465, 472 (1973); Nicholson v. Unsatisfied Claim and Judgment Fund Board, 265 Md. 453, 458-60 , 290 A.2d 384, 386-87 (1972); Arundel Asphalt Products, Inc. v. Morrison-Johnson, Inc., 256 Md. 170, 173 , 259 A.2d 789, 790-91 (1969); Pat Perusse Realty Co. v. Lingo, 249 Md. 33, 35 , 238 A.2d 100, 102 (1968); Sterling v. Local 438, Liberty Association of Steam and Power Pipe Fitters and Helpers Association, 207 Md. 182, 140-41 , 113 A.2d 389, 392-93 (1955); Klein v. Whitehead, 40 Md. App. 1, 13-14 , 389 A.2d 374, 382-83 (1978); Singer v. Steven Kokes, Inc., 39 Md. App. 180, 182-83 , 384 A.2d 463, 465-66 (1978); Felger v. Nichols, 35 Md. App. 182, 183-84 , 370 A.2d 141, 142-43 (1977); Tucker v. Tucker, 35 Md. App. 710, 714 , 373 A.2d 16, 17-18 (1977). If a judgment is to be accorded res judicata effect, the first ²⁹¹ requirement is that it be a final judgment on the merits. 4 Crucial to the resolution of the present controversy, therefore, is whether the judgment entered after the granting of the motion raising preliminary objection, pursuant to Maryland Rule 323 (a), was a judgment on the merits. Maryland Rule 323 (a) lists ten defenses that “constitute grounds for a motion raising preliminary objection.” Among these, is the defense of sovereign immunity which, unlike some of the other defenses, may be raised at any time.

Md. Rule 323 (b). According to one authority, Rule 323 confers “[t]he right to interpose certain defenses which do not go to the merits of the controversy through the use of a motion restricted in its scope and filed before the parties are at issue on any question of law or fact except those specifically raised by the motion.” (Emphasis added.) 3 Poe’s Pleading and Practice § 75 (Sachs ed. 1975). “The purpose of [the Rule] is to have a legal question ... decided before trial of the action on its merits....” Irvine v. Montgomery County, 239 Md. 113, 117 , 210 A.2d 359, 361 (1965). Although the “merits” of the underlying cause of action are never heard when a Rule 323 motion is granted on grounds of sovereign immunity, we conclude that the judgment entered is indeed a final judgment on the merits for purposes of res judicata. We shall explain.

Over the years, much scholarly debate has occurred with respect to what constitutes a judgment on the merits. In particular, a great deal of discussion has centered around the effect of various types of judgments entered without a full trial. Some are to be given res judicata effect while others are not. For example, today, in federal practice, and in most states, a dismissal, in the absence of a contrary rule or a statutory exception, is deemed to be with prejudice and on the merits. 5 A dismissal without prejudice is not, of course, an adjudication on the merits. 6 Other types of judgments even ²⁹² though not judgments “on the merits” are given a restricted type of res judicata effect.

This is the case with respect to “matters in abatement, such as jurisdiction of the subject matter, federal jurisdiction, jurisdiction over the res, jurisdiction over the defendant, venue, and related matters,” where the policies of res judicata apply although there has been no adjudication on the merits in the traditional sense. IB Moore’s Federal Practice ¶ 0.405[5], at 655-56 (2d. ed. 1974). The application of the doctrine is more limited in these latter situations, in that only the relitigation of the precise issue adjudged is precluded; if the jurisdictional deficiency is removed, the substantive claim may be litigated in a subsequent action. 7 A judgment on the merits has been defined traditionally as one which rules on “the real or substantial grounds of action or defense as distinguished from matters of practice, procedure, jurisdiction or. form.” Clegg v. United States, 112 F.2d 886, 887 (10th Cir. 1940). See also 1B Moore’s Federal Practice ¶ 0.409, at 1001-43 (2d. ed. 1974).

However, as the Supreme Court stated in Angel v. Bullington: ²⁹³ 330 U.S. 183, 190 (1947). In Angel , the Supreme Court held that a State court’s prior dismissal of an action on the ground that a State statute precluded recovery of certain types of deficiency judgments was res judicata in a second action brought in the federal courts, challenging the constitutionality of the statute. Thus, in the first action, the finding that the statute did not authorize the recovery sought prevented litigation of the main cause of action, yet, the judgment was a complete bar to the second suit based on the same cause of action. ²⁹² “It is a misconception of res judicata to assume that the doctrine does not come into operation if a court has not passed on the ‘merits’ in the sense of the ultimate substantive