Small v. Ciao Stables, Inc.

Rodowsky, J., delivered the opinion of the Court. In this case we hold, applying New York law, that partially disclosed principals, who sold a race horse through an agent-auctioneer, are barred from suing the buyer for the purchase price by the rescission of the sales contract adjudged by a New York court in the buyer’s action against the auctioneer, of which the sellers had actual knowledge but to which they were not parties. Appellants, Douglas R. Small, Jr. and Susan C. Small (the Smalls), residents of Pennsylvania, on March 28, 1977 executed a consignment contract with Fasig-Tipton Co., Inc. (Fasig) of Elmont, Long Island, New York. 1 Fasig is an auctioneer of thoroughbred horses. The subject of the consignment was Wahini, a bay filly foaled in April of 1975.

She was to be sold at the Maryland spring sale of selected two-year-olds in training to be conducted under the auspices of the Maryland Horse Breeders’ Association, Inc. This sale was scheduled for May 16 and 17,1977 at the sales pavilion on the fairgrounds at Timonium, Maryland. In the consignment contract the Smalls specified that Wahini was to be sold in the name of "Thomas Bowman, DVM, Agent.” By that contract the Smalls agreed to be bound by the provisions of sale printed on the contract and acknowledged that they had read the terms of sale. In the contract Fasig was appointed agent of the Smalls to sell Wahini and was given "full authority to transfer title thereto and to receive the proceeds of such sale” for the account of the Smalls. Fasig’s commission was a percentage of the accepted bid.

Appellee is Ciao Stables, Inc. (Ciao), a New York corporation, whose president was Theodore Shapiro. Shapiro obtained a sales catalogue for the auction sale at Fasig’s offices in Elmont. The sales catalogue listed Wahini as "Hip No. 11” and stated she was "[consigned by Thomas Bowman, D.V.M., Agent.” Shapiro came to Timonium on ⁵⁵⁶ Sunday, May 15, 1977 and determined to bid on Wahini. Because Shapiro had to return to New York, he authorized his friend, Daniel Marentette, to bid for him.

Wahini was knocked down to Marentette, as agent for Ciao, for $35,000 on Monday, May 16. Shapiro had arranged with Fasig for Fasig to extend credit, to Ciao for the purchase price. It was the obligation of Ciao to transport Wahini from the auction site. Wahini was taken to Sagamore Farms in Baltimore County, Maryland and boarded there until she was shipped to Belmont Park in New York where she arrived on May 26.

After purchase' Shapiro did not see Wahini work out until June 6. As the horse galloped by in that workout, Shapiro heard a noise which he interpreted to be a wind defect. An endoscopic examination of Wahini was made on June 8 by a veterinarian who reported finding a "left laryngal hemiplegia ('roarer’)” or wind defect. 2 That day Ciao telegrammed Fasig in Elmont advising that Wahini suffered from a wind condition and that it was cancelling payment, 3 and requested instructions for returning the filly. Fasig’s reply letter of June 15 requested payment and referred to the conditions of sale which required notice of a defect to be given within 7 days from the date of the sale. 4 ⁵⁵⁷ Thereupon Ciao, on July 8, 1977, brought an action against Fasig in the Supreme Court of the State of New York, New York County.

The complaint alleged breach of the terms of sale and of an express warranty for which Ciao sought rescission of the sales contract and damages for the expenses incurred in the maintenance and care of Wahini. The Smalls admit that they knew of the New York action against Fasig. They never attempted to intervene. The New York case was tried to a jury and resulted in a judgment entered on July 5, 1979 in favor of Ciao against Fasig for $7,500, plus costs.

The New York court further adjudged that the agreement between Ciao and Fasig of May 16, 1977 "be and the same hereby is rescinded....” 5 Wahini was resold by Fasig for $24,000 and the net proceeds were credited to the Smalls. The Smalls brought suit in the Circuit Court for Baltimore County against Fasig for the purchase price on December 23, 1977. A summary judgment was entered in favor of Fasig which was affirmed by the Court of Special Appeals in an unreported opinion filed March 9, 1979 (No. 610, September Term, 1978). The action out of which the instant appeal arises was brought by the Smalls against Ciao on June 29, 1978 in the Circuit Court for Baltimore County.

Summary judgment was entered in favor of Ciao against the Smalls for costs on the ground that the New York judgment was res judicata. The Court of Special Appeals affirmed in an unreported opinion (No. 849, September Term, 1979, filed March 20, 1980). We granted certiorari. 6 ⁵⁵⁸ The Smalls contend that the issues in the instant action are not the same as the issues in the New York case. The only portions of the record in the New York action which are part of the record in this case are the complaint, a memorandum opinion of the New York trial court denying motions by Fasig, the judgment of the trial court and the mandate of the intermediate appellate court.

While the basic position of the Smalls is that Wahini was not suffering from a wind condition on the date of sale, they also assert that their representations to Fasig contained in the printed consignment contract prepared by Fasig did not include anything about wind condition; that it was Fasig’s obligation to determine whether, after causing Wahini to be galloped, special announcements about wind condition were to be made at the time of sale; and that the failure to announce any wind condition results in independent liability of Fasig to Ciao, without recourse either by Ciao or Fasig against the Smalls. This analysis is directed primarily to the relationship between Fasig and the Smalls which is not before us. Ciao is not a party to the consignment contract, but only to the contract effected at the auction sale. The Smalls are a party to that auction sale contract as well as Fasig.

When the Smalls consigned Wahini with instructions that she be sold in the name of "Thomas Bowman, DVM, Agent” and the sales catalogue so stated, it was clear that Fasig was not selling as a principal. Fasig was selling for a principal, but the identity of that principal was not disclosed. Fasig was therefore acting as agent for a partially disclosed principal. Restatement (Second) of Agency § 144 (1957).

"Unless otherwise agreed, a disclosed or partially disclosed principal ⁵⁵⁹ is a party to a contract, if not negotiable or sealed, made by his agent within his authority.” Restatement (Second) of Agency § 147 (1957). Application of this principle was the basis of decision in Wheaton Lumber Co. v. Metz, 229 Md. 78 , 181 A.2d 666 (1962) in which the issue was whether an unsatisfied judgment for a purchase price, obtained by the third party against an agent for a disclosed or partially disclosed principal, barred a subsequent action for the price against the principal. We held it did not. A rule of election applicable in similar situations in which the contract sued upon was made with an agent for an undisclosed principal, is not applicable to partially disclosed principals.

We adopted the rationale in comment a to § 184 of the Restatement (Second) of Agency which states in part: But there is no room for a doctrine of election in the case of the disclosed or partially disclosed principal. In this case, the third person has a contract with the principal unless he chooses the sole responsibility of the agent at the time of making the contract. (Emphasis supplied.)1 7 1 The New York judgment had by its terms rescinded the contract of May 16, 1977 to which the Smalls were parties. That is the contract on which the Smalls sue Ciao in the instant action.

As we see it, the question presented is more fundamental than whether the issues in the New York action and in the present case have a sufficient identity. The question is whether, as a result of the New York judgment of rescission, the Smalls have any cause of action at all based on the auction sale contract. This turns on whether the New ⁵⁶⁰ York judgment is binding on the Smalls who were not parties to the New York action. It leads us to the principal issue in the case, namely, whether the Smalls were in privity with Fasig or are otherwise precluded by the New York judgment from litigating their claim based on that contract.

Both parties have relied on authorities which direct us to New York law to determine whether the Smalls are in privity with Fasig under the New York judgment. The Smalls have quoted Restatement of Conflict of Laws § 450, comment d (1934) (The law of the state where a valid judgment is rendered determines who are in privity with the parties to the judgment). Ciao cites State of Maryland ex rel. Gliedman v. Capital Airlines, Inc., 267 F. Supp. 298, 302-303 (D. Md. 1967) which is to the same effect.

Further, the trial court applied New York law in resolving what it described as a split of authority on whether a judgment which is being appealed can be applied as res judicata. This Court, in a case dealing with a Nevada divorce decree, observed that the "res judicata effect of the decree must be determined by application of Nevada law. . ..” Madden v. Cosden, 271 Md. 118 , 124 n.4, 314 A.2d 128 , 132 n.4 (1974). See also Pallen v. Allied Van Lines, Inc., 223 F. Supp. 394, 396 (S.D.N.Y. 1963); Gart v. Cole, 166 F. Supp. 129, 132 (S.D.N.Y. 1958), aff'd, 263 F.2d 244 (2d Cir.), cert. denied, 359 U.S. 978 , 79 S. Ct. 898 , 3 L. Ed. 2d 929 (1959); Restatement (Second) of Conflict of Laws § 94 (1971) ("What persons are bound by a valid judgment is determined, subject to constitutional limitations, by the local law of the State where the judgment was rendered.”). In view of the position which the parties have taken in this Court, and apparently below, we shall apply New York law.

Neither party has referred us to a New York decision which involves a fact situation like the one presented here, and we have not found one. The Smalls, referring to 2 F. Mechem, The Law of Agency § 2141 (2d ed. 1914) entitled, "Principal not bound by judgment respecting property rights against agent in action to which he was not a party,” quote the following proposition: A principal and his agent are not in privity with each other respecting property rights, and a judg ⁵⁶¹ ment against the agent cannot settle the rights of the principal, if he is not made a party to the action in which it was obtained, and has not intervened or appeared therein. [Footnotes omitted.] But in the immediately following section, Mechem states the rule is otherwise as to contract rights. Section 2142 of the same work states that "[i]f in an action to which the agent is a party, [the principal’s] rights have been determined under it, that determination would ordinarily be conclusive against the principal, unless he could impeach the judgment for fraud or collusion.” In support Mechem cites Lippman v. Campbell, 40 Mo. App. 564 (1890) and Moore v. Richardson, 100 Ill.

App. 134 , appeal dismissed, 197 Ill. 437 , 64 N.E. 330 (1902). However, in each of those cases the principal appears to have been undisclosed. Ciao takes the position that it is simply trying to use res judicata defensively in the present action against it by the Smalls. Citing Israel v. Wood Dolson Co., 1 N.Y.2d 116 , 151 N.Y.S.2d 1 , 134 N.E.2d 97 (1956) (judgment against plaintiff in action for breach of contract bars plaintiffs subsequent action against third party for malicious interference), Ciao says that lack of mutuality does not prevent the operation of collateral estoppel in New York.

Israel , however, was a case in which the determination in the prior litigation was applied against a party to the prior action. Other New York decisions which have applied collateral estoppel, absent mutuality, have done so against a party to the prior action. See Schwartz v. Public Administrator, 24 N.Y.2d 65 , 298 N.Y.S.2d 955 , 246 N.E.2d 725 (1969); B.R. DeWitt, Inc. v. Hall, 19 N.Y.2d 141 , 278 N.Y.S.2d 596 , 225 N.E.2d 195 (1967) and Good Health Dairy Products Corp. v. Emery, 275 N.Y. 14 , 9 N.E.2d 758 (1937). Simply because New York no longer requires mutuality for collateral estoppel does not resolve the problem here.

The problem is whether the judgment of rescission against Fasig in the prior case would be applied by New York against the Smalls so as to bar their subsequent action on the same contract. Recent New York decisions, and the decisions of federal courts in New York, where the question has been whether ⁵⁶² claim or issue preclusion is to be applied in subsequent litigation against a non-party to prior litigation,- have applied a representation analysis. As expressed in Restatement (Second) of Judgments § 85 (T.D. No. 2, April 15, 1975): (1) A person who is not a party to an action but who is represented by a party is bound by and entitled to the benefits of the rules of res judicata as though he were a party. A person is represented by a party who is: (b) Invested by the person with authority to represent him in an action . . . ,[ 8 J In a case in which a non-party was held to be in privity with a party to prior litigation, based on control of the prior litigation by the non-party, the Court of Appeals of New York described res judicata as follows: Generally speaking, the doctrine of res judicata gives "binding effect to the judgment of a court of competent jurisdiction and prevents the parties to an action, and those in privity with them, from subsequently relitigating any questions that were necessarily decided therein” (Matter of Shea, 309 N.Y. 605, 616 , 132 N.E.2d 864, 868 ).

It has been said that the term privity does not have a technical and well-defined meaning. It denominates a rule, how ⁵⁶³ ever, to the effect that under the circumstances, and for the purposes of the case at hand, a person may be bound by a prior judgment to which he was not a party of record (Restatement, Judgments, § 83, Comment a). It includes those who are successors to a property interest, those who control an action although not formal parties to it, those whose interests are represented by a party to the action, and possibly coparties to a prior action (Restatement, Judgments, §§ 81-90). [Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277 , 317 N.Y.S.2d 315, 320 , 265 N.E.2d 739, 743 (1970) (Emphasis supplied).] A 1979 decision, Gramatan Home Investors Corp. v. Lopez, 46 N.Y.2d 481 , 414 N.Y.S.2d 308 , 386 N.E.2d 1328 , occasioned review by the highest court of New York of its law of collateral estoppel, merger and bar as components of the broader doctrine of res judicata. In the course of holding that the assignee of a contract was not bound by a judgment against the assignor in an action instituted after the assignment and to which the assignee was not a party, the court stated: One of the fundamental principles of the system of justice is that every person is entitled a day in court notwithstanding that the same issue of fact may have been previously decided between strangers.

Generally, therefore, a person may not be precluded from litigating issues resolved in an action in which that person was not a party [cit. om.]. Considerations of due process prohibit personally binding a party by the results of an action in which that party has never been afforded an opportunity to be heard [cit. om.]. This prohibition, of course, is not unconditional and identity of the parties, as opposed to identity of the issues, is not an absolute. [Id. at 485-86, 414 N.Y.S.2d at 311 , 386 N.E.2d at 1331-1332 (Emphasis added).] Applications of the representation theory under New York law are found in the following cases. Privity was found be ⁵⁶⁴ tween a union and certain of its members in Weisz v. Levitt, 59 App. Div. 2d 1002, 399 N.Y.S.2d 720 (1977).

That case was a challenge to the constitutionality of a statute which excluded lump sum payments for accrued overtime credits from the computation of final average salary for retirement purposes of New York State employees. A prior action by the Civil Service Employees Association advancing that same contention had been tried and lost. Though the plaintiff in the second action was not a party in the first action, res judicata was applied. Citing the representational language in Watts v. Swiss Bank Corp., supra, the court held that the interests of the plaintiff "were adequately protected in the first action by his Union, CSEA, and he is now barred from maintaining this action.” 59 App. Div. 2d at 1003, 399 N.Y.S.2d at 721 .

In Gable v. Raftery, 65 N.Y.S.2d 513 (Sup. Ct., Westchester Co. 1945) there was