Landlord Tenant Res Judicata and Collateral Estoppel

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This week, the Maryland Appellate Court issued an unreported opinion in Montgomery Mall Condo, LLC vs. Peking Palace Corp.  We usually do not summarize unreported opinions because you technically cannot cite unreported opinions.  But that line is getting more blurred in 2023. This case addresses the application of res judicata and collateral estoppel doctrines in a case, which are issues of interest to Maryland personal injury lawyers.  This case involves a breach of lease and a breach of guaranty claim but the doctrines are applied with equal force in injury cases. This case also underscores that while many people did well economically during the COVID pandemic, some businesses were destroyed.

Facts of Montgomery Mall Condo, LLC vs. Peking Palace Corp

Montgomery Mall, a really great mall back in the day, entered into a lease agreement with Peking Palace, a restaurant business owned by Liu. As part of the agreement, Liu personally guaranteed the full payment and performance of Peking Palace’s obligations under the lease.

It is not uncommon for a landlord, such as a mall, to require a personal guarantee from the tenant, especially if the tenant is a small business or a start-up with limited financial resources or credit history. A personal guarantee provides additional security to the landlord, ensuring that the individual behind the business is personally liable for the financial obligations of the lease in case the business cannot pay its rent.  Landlords require this to mitigate their losses, particularly if they paid for some of the buildout of the space.   They also do it because they hold all the cards, and small businesses that want mall space have no other option.

Peking Palace failed to pay rent. Why?  COVID hit and destroyed Peking Palace before it ever got started.  This was just the worst-case scenario. He signed the lease in January 2020.   So Montgomery Mall, in all of its compassion, filed a suit against Peking Palace for breach of lease and against the guarantor for breach of the guaranty in the district court. The district court ruled in favor of Montgomery Mall, holding Peking Palace liable for $159,640.00. Peking Palace did not appeal the judgment.

Is this a reasonable thing for the mall to do to a business crushed by COVID?   The pandemic has had a significant impact on many businesses. So if you think it is unfair to hold guarantors responsible for circumstances beyond their control, I get it.  But some are going to say that the purpose of a personal guarantee is to provide the landlord with financial security in the event of unforeseen circumstances, such as a global pandemic.  Regardless of what the mall should do, I guess the more significant point is that it certainly has the legal right to do what it did.

Circuit Court Has Doubts and Guarantor Liability

So anyway, after securing the judgment in District Court, Montgomery Mall filed a suit against the man in the Circuit Court for his personal liability as the guarantor. In his defense, Liu argued that the COVID-19 pandemic frustrated the purpose of the guaranty, and the circuit court accepted this defense, reducing the amount of the guaranty.

The Circuit Court conducted a remote trial and rendered its decision with some heart and compassion. The landlord presented testimony that the tenant owed $241,925.82 and sought to recover the full limit of the guaranty from the guarantor and the remaining amount from the tenant. The appellees did not dispute the rent amount but argued that the rent was not owed due to frustration of purpose or because the landlord advised the tenant to stop construction.

The landlord argued that the rent amount had been conclusively established, and the doctrine of frustration of purpose could not apply due to the lease’s force majeure provision and the payment of rent not being objectively impossible. However, the Circuit Court ruled that the guarantor was responsible for a lesser rent amount and focused on the frustration of purpose doctrine instead of the collateral estoppel argument. The Circuit Court found that the frustration doctrine applied despite the lease’s force majeure provision and that defendants only needed to prove only subjective impossibility.

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In the case at hand, the landlord, Montgomery Mall, sought to recover damages for Peking Palace’s nonpayment of rent and the personal liability as a guarantor. The court addressed three main questions: (1) whether the circuit court was bound by res judicata as to count 1 (breach of lease), (2) whether the circuit court was bound by collateral estoppel as to count 2 (breach of guaranty), and (3) whether Liu had any viable defenses to the breach of guaranty claim.

Who Were the Judges That Decided This Case?

  1. Judge Stuart R. Berger was appointed to Maryland Appellate Court in 2012 by Governor O’Malley. Before joining the appellate court, Judge Berger was a judge on the Circuit Court for Baltimore City, where he served from 2000 to 2012. I tried a case before him – an extremely smart judge. He received his undergraduate degree from the University of Maryland, College Park, and his law degree from the University of Baltimore School of Law.
  2. Judge Donald E. Friedman: Judge Donald E. Friedman was appointed to the court in 2005 by Governor Robert L. Ehrlich Jr. Before his appointment to the appellate court, Judge Friedman was a partner at the law firm Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC. He earned his undergraduate degree from the University of Maryland, College Park, and his law degree from the University of Maryland Francis King Carey School of Law. Judge Friedman wrote the opinion in this case.
  3. Judge Sally D. Adkins is a retired Maryland Supreme Court judge who served on that court from 2008 to 2018. She was appointed to the court by Governor Martin O’Malley. Before her appointment to the Court of Appeals, Judge Adkins served on the Maryland Appellate Court and the Circuit Court for Wicomico County. She received her undergraduate degree from the University of Maryland, College Park, and her law degree from the University of Maryland Francis King Carey School of Law.  Maryland allows retired judges to come back and sit and hear cases.

What Is the Difference Between Res Judicata and Collateral Estoppel?

Res judicata and collateral estoppel are related legal doctrines that promote the finality of judgments and prevent the relitigation of issues already decided in previous cases. However, they serve different purposes and apply in different contexts.

Res Judicata

Res judicata, also known as claim preclusion, prevents parties from relitigating a claim or cause of action already decided by a court in a previous lawsuit. Res judicata applies when the following elements are present: (1) the parties in the current and previous litigation are the same or in privity with each other, (2) the claim in the current litigation is the same as the one in the previous litigation, and (3) the previous litigation resulted in a final judgment on the merits. Res judicata promotes judicial efficiency and prevents inconsistent judgments by prohibiting the relitigation of claims that have already been decided.

Collateral Estoppel

Collateral estoppel, also known as issue preclusion, prevents parties from relitigating specific issues determined by a valid and final judgment in a previous lawsuit. Collateral estoppel applies when the following elements are present: (1) the issue in the current litigation is identical to the one decided in the previous litigation, (2) the issue was actually litigated and determined in the previous litigation, (3) the issue’s determination was essential to the previous judgment, and (4) the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate the issue in the prior proceeding.

The purpose of collateral estoppel is to prevent the relitigation of specific issues that have been decided, thus promoting judicial efficiency and protecting parties from the burden of multiple lawsuits over the same issues.

Res Judicata in Maryland

Under Maryland law, res judicata (also known as claim preclusion) is a legal doctrine that prevents parties from relitigating a claim that has already been decided by a final judgment on the merits in prior litigation between the same parties or their privies. The purpose of res judicata is to promote finality in litigation, conserve judicial resources, and protect parties from the burden of multiple lawsuits.

For res judicata to apply in Maryland, three requirements must be satisfied:

  1. Identity of the parties: The parties in the present litigation must be the same or in privity with those in the prior litigation. Privity refers to a close legal relationship that justifies treating the parties as the same for purposes of res judicata.
  2. Identity of the claims: The claim in the present litigation must be the same as the one adjudicated in the prior litigation. In Maryland, courts determine whether claims are identical by considering whether they arise from the same set of operative facts or the same transaction or occurrence.
  3. Final judgment on the merits: The prior litigation must have resulted in a final judgment on the claim’s merits. A judgment on the merits is a decision that addresses the substance of the claim rather than procedural issues.

If these requirements are met, res judicata bars the parties from raising not only the issues that were actually litigated in the prior case but also any issues that could have been raised in that case.

One case you often see cited for res judicate in Maryland is Anne Arundel County Board of Education v. Norville, a 2005 Maryland Supreme Court opinion.   In this case, the court provided a comprehensive analysis of the doctrine of res judicata and its application under Maryland law. The court discussed the requirements for res judicata to apply the ones set out above:  the parties’ identity, the claims’ identity, and the final judgment on the merits.

In this case, the Maryland Appellate Court held that the Montgomery County Circuit Court was bound by res judicata and correctly declined to disturb the district court judgment against Peking Palace for breach of the lease.

Doctrine of Collateral Estoppel in Maryland

The court cited Colandrea v. Wilde Lake Cmty. Ass’n, Inc., 361 Md. 371, 391-92 (2000) and the four-part test that case gives us:

  1. Was the issue decided in the prior adjudication identical to the one presented in the action in question?
  2. Was there a final judgment on the merits?
  3. Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication?
  4. Was the party against whom the plea is asserted given a fair opportunity to be heard on the issue?

The Maryland Appellate Court found that the circuit court was bound by collateral estoppel in deciding Count II. Collateral estoppel, or issue preclusion, prevents the relitigation of issues that were actually litigated and determined by a valid and final judgment. The bottom line is that the guarantor was in obvoius privity with the tenant in the Rent Court Action and had an opportunity to be heard on the question of how much rent was owed. So the court determined that there was privity between Peking Palace and the guarantor as a matter of law, and there was a final judgment on the merits in which the guarantor was given a fair opportunity to be heard.

Commercial Frustration a No Go

The court held that the commercial frustration of purpose doctrine does not apply as a defense to a breach of guaranty action. The purpose of the guaranty was to induce the landlord to enter the lease with Peking Palace, not to open a restaurant. While the COVID-19 pandemic adversely affected the business, the commercial frustration of purpose defense did not apply to Liu in the circuit court.

Gist of Ruling

The court concluded that, as to Count 1, the circuit court was bound by res judicata and correctly declined to disturb the district court judgment against Peking Palace for breach of the lease. As to Count 2, the court held that the circuit court was bound by collateral estoppel to find that Liu’s liability under the guaranty for Peking Palace’s default was equal to the amount determined in the district court judgment. The court reversed the circuit court judgment as to Court 2. It remanded with instructions to enter judgment on the guarantor’s liability under the guaranty equal to the amount of Peking Palace’s liability determined in the district court judgment, and to determine Montgomery Mall’s costs to enforce the guaranty.

Maybe not a fair outcome but one that conforms with Maryland law. The two do not always connect.