Res judicata is a powerful tool – when properly invoked. But Michigan courts have grown increasingly precise about its requirements. The Michigan Court of Appeals recent to-be-published opinion in McPherson v. Alten Homes, Inc., MCOA No. 368756, continues that trend and clarifies the limitations of privity amongst defendants in related litigation for purposes of res judicata.
In McPherson v. Alten Homes, Inc., the plaintiff was a tenant who fell when a porch railing gave way at his rented home in December 2018. His first lawsuit named only Alvin Sallen – the sole shareholder of Alten Homes, Inc., the actual landlord – who obtained summary disposition because he owed no individual duty to the plaintiff. Before that case concluded, plaintiff filed a second lawsuit against Alten Homes as owner/landlord, and James White and James White Enterprises as the contractors who had performed maintenance on the porch.
Alten Homes moved for summary disposition, arguing res judicata barred plaintiff’s claims because the first case against Sallen was decided on the merits and Sallen was in privity with Alten Homes. The trial court initially denied that motion, holding that Alten Homes was a corporation separate and distinct from Sallen with different legal rights. On reconsideration – decided by a different judge – the trial court reversed course and granted summary disposition relying on Wildfong v. Fireman’s Fund Ins. Co., 181 Mich App 110; 448 NW2d 722 (1989), which it described as “directly on point” as establishing a bright-line rule that a closely-held corporation and its shareholders are always in privity. The contractors then moved for summary disposition arguing that they too were in privity with Alten Homes by virtue of their contractual relationship. The trial court agreed and initially dismissed the claims against the contractors “on the basis of, I don’t know, nonjoinder,” but later modified the basis to “for the reasons set forth in the defendants’ record . . . .”
The Court of Appeals reversed the grant of summary disposition in favor of Alten Homes. It held that the trial court erred in concluding that Sallen and Alten Homes were in privity, reasoning that Wildfong “did not set forth a bright-line rule that, in each and every circumstance, a closely-held corporation and its shareholders are in privity.” Rather, Wildfong addressed privity among plaintiffs – not defendants – and concluded those plaintiffs were in privity because they were individually asserting and protecting their own rights and had actual control over the prior litigation. Drawing a sharp distinction, the Court held that privity analysis for defendants turns on whether those defendants share a “substantial identity of interests” in their potential liabilities. Unlike Alten Homes, Sallen had no liability to the plaintiff for the railing failure and did not share common potential liability. Consequently, no substantial identity of interests existed between Sallen and Alten Homes and they were not in privity for res judicata purposes.
The Court of Appeals next reversed the trial court’s grant of summary disposition to the contractors, labeling their privity argument as “totally meritless.” It reasoned that even accepting defendants’ transitive logic – that the contractors were in privity with Alten Homes, which they claimed was in privity with Sallen – the theory collapsed based on the Court’s holding that Alten Homes was not in privity with Sallen in the first place. More fundamentally, the Court held that the mere fact that multiple parties are sued together in the same lawsuit was “wholly insufficient to establish privity.” This is true even where Defendants share a defense, or whose conduct is interconnected, because those considerations are insufficient to establish a “substantial identity of interests” among those defendants.
McPherson provides two key takeaways for litigators. First, no bright bright-line privity rule exists between closely-held corporations and their shareholders. Second, legally distinct Defendants attempting to mount a res judicata defense must do so based on a substantial identity of interest in common potential liability. If that identity of interest is lacking, res judicata will not bar the subsequent action regardless of how closely related those parties may appear.