Purchasers of condo hotel units brought a putative class action in state court against the developers and agents of the project, asserting violation of California’s Unfair Competition Law (UCL), based on failure to disclose and intentionally concealing purchasers’ right under Interstate Land Sales Full Disclosure Act (ILSA) to rescind their purchase agreements. After removal, developers and agents filed third-party complaint against their attorneys (“Law Firm”), asserting claims for professional negligence, breach of contract, and breach of fiduciary duty, relating to drafting of purchase agreements and other documents. After summary judgment determination of developer’s and agents’ liability under the UCL, Law Firm filed a motion to participate in main action by defending against class certification and to reopen expert witness discovery regarding damages if class certification was granted.
Law Firm and certain Defendants (“Party T”), as Third Party Plaintiffs filed a joint motion to stay the Third Party Complaint, which the Court granted. In response, Plaintiffs argued that Law Firm shouldn’t be allowed to reopen discovery after liability has been established because it should have conducted discovery years ago. Law Firm made a strategic decision to stay out of the main action when it filed a joint motion to stay prosecution of the third party complaint. Plaintiffs claimed that if the Court were to allow Law Firm to participate in the main action, it should be limited to participating in future briefing and the remedies trial in the action but should be allowed expert witness discovery. According to Plaintiffs, Law Firm shouldn’t be allowed to begin litigation anew after liability has already been determined.
District Court Judge Gonzalo P. Curiel opined that Rule 14(a)(2) provides that a Third Party Defendant “may assert against the plaintiff any defense that the third-party plaintiff has to the plaintiff’s claim….” Rule 14(a)(2)(C). The Advisory Committee Notes states: “Rule 14(a) has been expanded to clarify the right of the third-party defendant to assert any defenses which the third-party plaintiff may have to the plaintiff’s claim. This protects the impleaded third-party defendant where the third-party plaintiff fails or neglects to assert a proper defense to the plaintiff’s action.”
The judge explained that one rationale for this Rule is that because Law Firm can’t re-litigate the question of certain Defendants’ liability to Plaintiffs, Rule 14(a) prevents the prejudice or unfairness that could result from the defendants’] failure to assert the appropriate defenses. While the plaintiff and the third-party defendant are not opposing parties, Rule 14 “recognizes the derivative nature of the third-party defendant’s potential liability and permits it essentially to stand in the defendant’s shoes and assert its defenses….”
Quoting the Third Circuit, Judge Curiel wrote, “A fair reading of Rule 14(a) indicates clearly that since the third party defendant may be liable to the original defendant, the third party defendant must be permitted to take part in the trial and conduct examinations and cross examination as the rules of evidence permit.”
For the purpose of defense against plaintiff’s complaint, the judge relied on the Tenth Circuit, which held “a third party defendant is in the law suit as an adverse party to the same extent as the defendant and must act accordingly. This assures a third party defendant complete defense protection in an action where he may be liable for the judgment in favor of the plaintiff.”
Here, the parties didn’t dispute that Law Firm may raise affirmative defenses to Plaintiffs’ complaint in its answer to the Third Party Complaint. Law Firm didn’t seek to assert an affirmative defense to Plaintiffs’ claims as liability had already been determined—instead it wanted to participate in the dispute, which would involve expert witness discovery on the calculation of damages if class certification was granted. Law Firm claimed that the expert reports prepared three years ago didn’t adequately address what, if any, restitution, was available because Party T’s expert only examined four units and didn’t address the value of each of the putative class member’s units at the relevant point in time. Given that expert witness discovery wasn’t comprehensive, Law Firm argued prejudice if it wasn’t allowed to designate its own experts.
Judge Curiel agreed, finding that the case was in “a unique procedural posture” where liability had been established and the remaining issues were class certification and the calculation of damages. Law Firm’s liability and the amount of liability—if liability was found against it—might be contingent on class certification and the amount of damages awarded to Plaintiffs in the main action, the judge reasoned. Hence, if Law Firm wasn’t able to participate in the class certification motion and to assert theories opposing Plaintiffs’ damages calculations, it would be prejudiced.
As a result, based on the reasoning behind Rule 14 to allow third party defendants to participate in the main action in order to protect them against a decision of liability against the defendant to the plaintiff—which the judge thought would include the amount of damages, he held that Law Firm should be allowed to participate in the defense of this action on an ongoing basis and be allowed to conduct expert witness discovery if class certification was granted.
The Court granted Law Firm’s motion pursuant to Rule 14(a) and ordered that Law Firm was permitted to participate in the defense of this action, including but not limited to class certification briefing and trial, on an ongoing basis.
Beaver v. Tarsadia Hotels, — F.R.D. —-, 2016 WL 3479015 (S.D. Cal. June 27, 2016)