On the Merits...

Hardy v. America’s Best Home Loans, No. F067389 (D5 Dec. 22, 2014)

Plaintiff filed a pro se federal case against defendant, which was ultimately dismissed “on the merits” under Federal Rule of Civil Procedure 41(b) because he failed to file an amended complaint after a motion to dismiss with leave to amend was granted by the federal district court. Plaintiff re-filed his claims in state court, based on the same factual allegations. On the eve of trial, defendant moved for judgment on the pleadings, on the grounds that the claims were barred by the collateral estoppel effect of the prior dismissal. The trial court granted the motion.

On appeal, the parties agree that a dismissal for failure to prosecute is has no preclusive effect under California law because they are not “on the merits.” But defendant argues that federal common law—the law of the venue entering the prior dismissal—controls the preclusivity of the order. It says that the court’s designation of the Rule 41(b) dismissal as “on the merits” means that the dismissal did have preclusive effect.

That is about one-third right. As the Supreme Court explained in Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 503 (2001), federal law does control the preclusive effect of a prior federal judgment. But Rule 41(b)’s designation of a dismissal as “on the merits” does not control the issue, federal common law does.  And when the judgment is a state law claim brought in diversity, the federal rule generally borrows the state rule of decision, absent some incompatibility with federal interests.  Because the claims at issue here were state law claims, there would be no preclusion because California law would not interpret the state equivalent of a Rule 41(b) dismissal for failure to prosecute as having a preclusive effect.

The court goes on to say that even if the federal rule applies, there would nonetheless be no collateral estoppel because plaintiff’s claims were not actually litigated in the prior case—a requirement for federal issue preclusion.  Even if a dismissal under Rule 41(b) as a penalty for failure to prosecute could give rise to preclusion under res judicata, since it does not actually litigate the merits of the claims, dismissing them based on collateral estoppel would have been inappropriate. (Which begs the question -- Why didn’t defendant move for judgment on the pleadings on res judiciata too?).

Reversed.