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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT ________________________
No. 18-15276 ________________________
D.C. Docket No. 2:15-cv-00957-KOB
RONALD SELLERS, As assignee of Gary Gardner & Gary Gardner Builders, Inc.,
Plaintiff-Appellee,
versus
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY,
Defendant-Appellant,
STEVE DURHAM, d.b.a. S. Durham Contracting,
Defendant.
________________________
Appeal from the United States District Court for the Northern District of Alabama ________________________
(August 7, 2020) Case: 18-15276 Date Filed: 08/07/2020 Page: 2 of 18
Before WILSON, LAGOA, and ANDERSON, Circuit Judges.
LAGOA, Circuit Judge:
Ronald Sellers wanted a new home, so he hired Gardner Builders, Inc., to
build it for him. Shortly after Sellers moved into the new home, construction defects
began to appear. Three lawsuits later—involving one state court action and two
separate federal actions—this appeal asks this Court to determine the preclusive
effect of a judgment entered by a federal court exercising diversity jurisdiction on a
nonparty to that earlier federal action.
Nationwide Mutual Fire Insurance Co. (“Nationwide”) appeals both the
district court’s order denying Nationwide’s motion in limine and the final judgment
entered in favor of Ronald Sellers, as assignee of Gary Gardner and Gary Gardner
Builders, Inc. (“Sellers/Gardner”). In its motion in limine, Nationwide sought to bar
Sellers/Gardner from presenting evidence of when damages to Ronald Sellers’s
(“Sellers”) home manifested based on the doctrine of issue preclusion. Nationwide
argued that the issue had already been decided in an earlier federal court declaratory
judgment action in which the federal court exercised diversity jurisdiction. When
determining the preclusive effect of an earlier judgment rendered by a federal court
exercising diversity jurisdiction, federal common law adopts the rules of issue
preclusion applied by the State in which the rendering court sits. In this case, the
district court was required to apply Alabama’s rules of issue preclusion. Because
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the district court instead applied a federal rule of issue preclusion and that federal
rule is not substantively similar to Alabama’s rule on nonparty issue preclusion, we
reverse the district court’s order denying Nationwide’s motion in limine, vacate the
final judgment in favor of Ronald Sellers, as assignee of Sellers/Gardner, and
remand for further proceedings.
I. FACTUAL AND PROCEDURAL HISTORY
As noted above, this appeal involves the application of nonparty issue
preclusion within the context of three proceedings—a consent judgment obtained in
an action brought in an Alabama state court (the “state court case”); a federal
declaratory judgment action rendered in an Alabama district court exercising
diversity jurisdiction (the “declaratory judgment action”); and the instant case,
brought under Alabama’s “direct action” statute, Alabama Code section 27-23-2, in
an Alabama district court (the “direct action”). The relevant factual and procedural
history of the three cases is as follows.
On August 17, 2004, Sellers entered into a contract with Gary Gardner and
Gardner Builders, Inc. 1 (collectively, “Gardner”) for the construction of a home.
Gardner hired subcontractor Steve Durham d/b/a S. Durham Contracting
(“Durham”) to perform footing and foundation work on the home. Sellers moved
1 Although the instant case was styled as “Gary Gardner Builders, Inc.,” there is no dispute that “Gardner Builders, Inc.” is the same entity. 3 Case: 18-15276 Date Filed: 08/07/2020 Page: 4 of 18
into the home on June 29, 2005, and soon began noticing construction defects with
the home. Relevant to this appeal, Nationwide issued a contractors policy of
insurance, policy no. 77 AC 843-676-3001 (the “policy”), to Durham with a policy
period from December 20, 2006, to December 20, 2007.
In the state court case, Sellers filed suit against Gardner and Durham in the
Circuit Court of Jefferson County, Alabama, in 2008. On August 19, 2009, Gardner
Builders, Inc., filed a cross complaint against Durham alleging that if it was found
liable for the injuries alleged in Sellers’s complaint, then Durham was responsible
for the damages.2 Sellers and Gardner subsequently entered into a settlement
agreement and assignment in October 2011. In the assignment, Sellers agreed to
release all claims against Gardner in exchange for $100,000 and Gardner’s
assignment to Sellers of any and all claims or causes of action Gardner had, or may
have, to recover against Durham. The following month, Sellers/Gardner filed an
amended cross complaint against Durham.
On July 15, 2011, while the state court case was pending, Nationwide filed a
declaratory judgment action against Durham (its insured) and Sellers in the United
States District Court for the Northern District of Alabama. Relevant here, the district
court exercised diversity jurisdiction in the declaratory judgment action. Nationwide
2 Steve Durham filed a petition for bankruptcy on July 2, 2010, and was discharged from bankruptcy on October 8, 2010. 4 Case: 18-15276 Date Filed: 08/07/2020 Page: 5 of 18
sought a determination of its obligation to defend and indemnify Durham for
Sellers’s claims in the state court case. Specifically, Nationwide argued that the
causes of action and damages alleged by Sellers were not covered under the terms
of the policy for several reasons: 1) the allegations did not constitute an “occurrence”
under the policy; 2) the damages arose before the inception of the policy, which was
effective December 20, 2006, to December 20, 2007; 3) multiple exclusions applied;
and 4) the policy did not afford coverage for economic damages. Nationwide filed
a motion for summary judgment, and Sellers filed a response to Nationwide’s
motion.
On August 6, 2012, the magistrate judge entered a report and recommendation
in the declaratory judgment action recommending that the district court grant
Nationwide’s motion for summary judgment against Sellers because, among other
reasons, the damages to Sellers’s home allegedly caused by Durham’s faulty work
manifested in April 2006, prior to the inception of Nationwide’s policy period. On
August 27, 2012, the district court adopted the report and recommendation and
entered a final judgment providing that “Nationwide . . . has no obligation to defend
or indemnify either of the defendants with reference to the subject matter of this
action.”
After the district court entered final judgment in Nationwide’s favor in the
declaratory judgment action, Sellers/Gardner and Durham entered into a consent
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judgment in the state court case in October 2013. The consent judgment provided
that “judgment is entered in favor of Plaintiff Ronald Sellers, individually and as
assignee of Gary Gardner and Gardner Builders (Plaintiff) and against Steve
Durham, individually and doing business as S. Durham Contracting (Defendant) in
the total amount of $250,000.”
On May 12, 2015, Sellers/Gardner filed the instant direct action against
Nationwide and Durham pursuant to Alabama Code section 27-23-2, Alabama’s
“direct action” statute, seeking to hold Nationwide liable for the consent judgment
entered in favor of Sellers/Gardner and against Durham in the state court case.
Nationwide filed an answer denying that it was under any obligation to satisfy the
consent judgment and asserting affirmative defenses, including a second affirmative
defense of estoppel, res judicata, collateral estoppel, claim preclusion, issue
preclusion, and law of the case.
Before trial, Nationwide filed a motion in limine seeking to preclude
Sellers/Gardner from introducing evidence that the effects of Durham’s defective
work manifested sometime after April 2006. Specifically, Nationwide argued that
“the issue of when Durham’s defective work caused resulting damages has already
been litigated” to judgment between the “same parties” in the declaratory judgment
action. Sellers/Gardner also filed a motion in limine seeking to preclude Nationwide
from offering any evidence regarding the declaratory judgment action.
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The matter proceeded to trial on September 10, 2018. Prior to selecting a jury,
the district court granted Sellers/Gardner’s motion in limine and denied without
prejudice Nationwide’s motion in limine. The trial concluded the next day, and the
jury rendered a verdict in Sellers/Gardner’s favor. In a special verdict form, the jury
found that “Durham’s faulty workmanship caused property damage to parts of Mr.
Sellers’ home, other than to the footings themselves,” and that “the property damage
caused by Mr. Durham’s work manifest[ed] between December 20, 2006, and
December 20, 2007.”
After the verdict, the district court requested that Nationwide file a motion to
reconsider its motion in limine. On September 19, 2018, Nationwide filed its motion
to reconsider. Nationwide argued that the district court erred by denying its motion
in limine because the issue of whether the damages to Sellers’s home manifested
during the policy period was previously litigated in the declaratory judgment action
and decided in Nationwide’s favor. Nationwide asserted that issue preclusion
applied even though Gardner did not participate in the declaratory judgment action
because the assignment between Sellers and Gardner in the state court case
established “complete privity” between them in the declaratory judgment action.
Sellers/Gardner filed a response to Nationwide’s motion to reconsider arguing, in
part, that while issue preclusion bars an assignee from relitigating an issue that the
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assignor litigated in a prior case, here, Gardner was the assignor, not the assignee,
and issue preclusion therefore did not apply.
On November 28, 2018, the district court issued its memorandum opinion
denying Nationwide’s motion in limine. In addressing Nationwide’s issue
preclusion argument, the district court held that federal rules of issue preclusion
applied:
In issue preclusion, the court applies the preclusion law of the same legal system that determined the underlying case. See CSX Transp., Inc. v. Bhd. of Maint. of Way Emps., 327 F.3d 1309, 1316 (11th Cir. 2003). Because the underlying case here was decided in federal district court, federal preclusion law applies.
The district court focused its analysis on whether the party to be precluded, i.e.,
Gardner, had a full and fair opportunity to litigate the issue in the declaratory
judgment action and assumed, without deciding, that the same issue was raised,
actually litigated, and essential to the judgment reached in the declaratory judgment
action. The district court found that “privity did not exist in the proper configuration
between the parties during the original declaratory judgment litigation.”
That same day, the district court entered an order granting the motion to
reconsider but denying the motion in limine. Subsequently, on February 6, 2019,
the district court entered final judgment in favor of Sellers/Gardner and against
Nationwide in the amount of $250,000. This appeal ensued.
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II. STANDARD OF REVIEW
“Orders denying motions in limine are reviewed for abuse of discretion.”
Luxottica Grp., S.p.A. v. Airport Mini Mall, LLC, 932 F.3d 1303, 1311 (11th Cir.
2019). “Under that standard, we will reverse a district court’s ruling ‘only if the
court applie[d] an incorrect legal standard, follow[ed] improper procedures in
making the determination, or ma[d]e[ ] findings of fact that are clearly erroneous.’”
Id. (alterations in original) (quoting Kropilak v. 21st Century Ins. Co., 806 F.3d
1062, 1067 (11th Cir. 2015)). “A court applies the wrong legal standard when it
analyzes evidence under the wrong test or applies a test to evidence that the test
should not apply to.” Aycock v. R.J. Reynolds Tobacco Co., 769 F.3d 1063, 1068
(11th Cir. 2014). This Court reviews a district court’s ruling on issue preclusion,
also known as collateral estoppel, 3 under a de novo standard of review. Lops v. Lops,
140 F.3d 927, 937 n.10 (11th Cir. 1998).
III. ANALYSIS “Issue preclusion . . . bars ‘successive litigation of an issue of fact or law
actually litigated and resolved in a valid court determination essential to the prior
judgment,’ even if the issue recurs in the context of a different claim.” Taylor v.
Sturgell, 553 U.S. 880, 892 (2008) (quoting New Hampshire v. Maine, 532 U.S. 742,
3 The terms “issue preclusion” and “collateral estoppel” have the same meaning. The use of the term “issue preclusion,” however, has become prevalent in recent caselaw as it creates less confusion regarding its application. Taylor v. Sturgell, 553 U.S. 880, 892 n.5 (2008). 9 Case: 18-15276 Date Filed: 08/07/2020 Page: 10 of 18
748 (2001)). “A person who was not a party to a suit generally has not had a ‘full
and fair opportunity to litigate’ the claims and issues settled in that suit.” Id. Thus,
there is a general rule against the application of issue preclusion to nonparties to the
prior litigation. Id. at 892–93. Although there are various exceptions to the general
rule against nonparty preclusion, see, e.g., id. at 893–95, for the purposes of our
discussion, Alabama law provides for the application of issue preclusion where a
nonparty was in privity with a party to the prior action, Leon C. Baker, P.C. v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 821 So. 2d 158, 165–66 (Ala. 2001).
On appeal, Nationwide argues that the district court erred in denying its
motion in limine because Gardner’s assignment to Sellers in the state court case
established privity between Sellers and Sellers/Gardner such that the general bar
against nonparty issue preclusion does not apply. Specifically, Nationwide contends
that the district court failed to consider the assignment within the context of
Alabama’s “expansive definition of privity, which includes not only a successive
interest to the same property right, but also ‘an identity of interest in the subject
matter of litigation,’” when it denied Nationwide’s motion in limine. Wood v.
Kesler, 323 F.3d 872, 880 n.10 (11th Cir. 2003) (quoting Leon C. Baker, P.C., 821
So. 2d at 165). In response, Sellers/Gardner argues that Alabama’s rules of privity
do not apply and cites to this Court’s opinion in CSX Transportation, Inc. v.
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Brotherhood of Maintenance of Way Employees, 327 F.3d 1309 (11th Cir. 2003),
which the district court relied on in denying the motion in limine.
In Brotherhood of Maintenance of Way Employees, this Court applied federal
rules of issue preclusion to a judgment entered by a federal court exercising federal
question jurisdiction and stated that “[w]e now hold that federal preclusion
principles apply to prior federal decisions, whether previously decided in diversity
or federal question jurisdiction.” Id. at 1316. Subsequently, however, this Court
decided CSX Transportation, Inc. v. General Mills, Inc., 846 F.3d 1333 (11th Cir.
2017), in which this Court stated that while “federal common law determines the
preclusive effect of an earlier judgment against a party,” in applying federal common
law, we must “adopt[] the state rule of collateral estoppel to determine the preclusive
effect of a judgment of a federal court that exercised diversity jurisdiction.” Id. at
1335, 1337. In reconciling divergent precedent from this Court on the issue, we held
“that federal common law borrows the state rule of collateral estoppel to determine
the preclusive effect of a federal judgment where the court exercised diversity
jurisdiction.” Id. at 1340; see also Taylor, 553 U.S. at 891 n.4 (“For judgments in
diversity cases, federal law incorporates the rules of preclusion applied by the State
in which the rendering court sits.”). We also specifically found that the statement in
Brotherhood of Maintenance of Way Employees that “federal preclusion principles
apply to prior federal decisions . . . previously decided in diversity,” 327 F.3d at
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1316, was dicta with no precedential effect as it was unnecessary to justify the
decision reached in that case. Gen. Mills, Inc., 846 F.3d at 1338–39.
An action under the Declaratory Judgment Act, “does not, of itself, confer
jurisdiction upon the federal courts”; therefore, “a suit brought under the Act must
state some independent source of jurisdiction, such as the existence of diversity or
the presentation of a federal question.” Borden v. Katzman, 881 F.2d 1035, 1037
(11th Cir. 1989). Because the district court in the prior declaratory judgment action
exercised diversity jurisdiction, the district court here was required to determine the
preclusive effect of that earlier federal judgment based on the rules of issue
preclusion from the State in which the rendering court sat—in this case, Alabama.
Thus, the district court erred here when it failed to do so.
Our determination that the district court erred in failing to apply Alabama’s
rule of issue preclusion, however, does not end our analysis. We must also determine
whether the district court nonetheless may have applied the correct legal standard if
the rules of issue preclusion are substantively the same under Alabama law and
federal law such that the holding would remain the same. Cf. SFM Holdings, Ltd. v.
Banc of Am. Sec. LLC, 764 F.3d 1327, 1337 (11th Cir. 2014) (stating that the Court
did not need to resolve whether federal or Florida rules of preclusion applied because
“[a] comparison between Florida rules and federal rules governing claim and issue
preclusion reveals that the relevant principles are largely identical”).
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A review of the relevant case law demonstrates that the Alabama rules of
nonparty issue preclusion—specifically, the application of privity to justify nonparty
issue preclusion—are not substantively the same as the federal rules of nonparty
issue preclusion. Under Alabama law, “[t]he elements of [issue preclusion] are: (1)
an issue identical to the one litigated in the prior suit; (2) that the issue was actually
litigated in the prior suit; (3) that resolution of the issue was necessary to the prior
judgment; and (4) the same parties.” Stinnett v. Kennedy, 232 So. 3d 202, 220 (Ala.
2016) (quoting Dairyland Ins. Co. v. Jackson, 566 So. 2d 723, 726 (Ala. 1990)).
The “same parties” requirement, however, is not “strictly enforced if the party
raising the defense of [issue preclusion], or the party against whom it is asserted, is
in privity with a party to the prior action.” Dairyland Ins. Co., 566 So. 2d at 726.
Therefore, although not a party to the prior suit, under Alabama law, a person in
privity with a party to the previous litigation may be precluded from relitigating the
same issue. See Malfatti v. Bank of Am., N.A., 99 So. 3d 1221, 1225 (Ala. 2012)
(“For a prior judgment as to an issue to have a preclusive effect on a party’s later
relitigation of that issue, it must be shown that the person against whom the
preclusive effect is sought, or a person in privity with that person, was a party to the
prior litigation in which the issue was decided and that the issue for which preclusion
is sought was actually litigated in the prior action.” (quoting McDaniel v.
Harleysville Mut. Ins. Co., 84 So. 3d 106, 111–12 (Ala. Civ. App. 2011))).
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Under Alabama law, “[t]he test for determining if two parties are in privity
focuses on identity of interest” and this “reliance on the identity-of-interest test for
determining the existence of privity extends at least as far back as 1853.” Dairyland
Ins. Co., 566 So. 2d at 726 (citations omitted)) “The term ‘privity’ has not been
uniformly defined with respect to [issue preclusion]. . . . [T]he Alabama cases seem
to resolve the question on an ad hoc basis in which the circumstances determine
whether a person should be bound by or entitled to the benefits of a judgment.”
Hughes v. Martin, 533 So. 2d 188, 191 (Ala. 1988) (quoting Joseph Francis Danner,
Issue Preclusion in Alabama, 32 Ala. L. Rev. 500, 520–21 (1981)); accord Leon C.
Baker, P.C., 821 So. 2d at 165.
Significantly, this Court has explained that Alabama “follows an expansive
definition of privity, which includes not only a successive interest to the same
property right, but also ‘an identity of interest in the subject matter of litigation.’”
Wood, 323 F.3d at 880 n.10 (finding that defendant-state trooper in a § 1983 action
shared an identity of interest with the State of Alabama in the plaintiff’s prior
prosecution and, therefore, privity was established); accord Hunter v. City of Leeds,
941 F.3d 1265, 1274 (11th Cir. 2019) (“Alabama’s expansive definition of privity
‘includes not only a successive interest to the same property right, but also “an
identity of interest in the subject matter of [the] litigation.”’” (alteration in original)
(quoting Wood, 323 F.3d at 880 n.10)); see also Coyle v. Ala. Power Co., 611 So.
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2d 1019, 1021 (Ala. 1992) (“Where there is no identity of interest, privity does not
exist.”); Franklin v. Dean, No. 2:11-CV-683-WKW, 2013 WL 1867105, at *8 (M.D.
Ala. May 3, 2013) (applying Alabama law of issue preclusion to find an attorney
was in privity with a client in prior litigation as the attorney and client “shared the
same interest in the state-court action because each had a stake in obtaining a
garnishment judgment against” plaintiff’s “bank account for payment of the money
judgment”); City of Montgomery v. Vaughn, 138 So. 3d 996, 1004 (Ala. Civ. App.
2013).
In contrast, under the federal common law rules of nonparty preclusion privity
cannot be based solely on an identity of interest. In Taylor, the Supreme Court in
clarifying nonparty preclusion articulated the following six categories of exceptions
to nonparty preclusion under federal common law: (1) the nonparty agreed to be
bound by the litigation of others; (2) a substantive legal relationship existed between
the person to be bound and a party to the judgment; (3) the nonparty was adequately
represented by someone who was a party to the suit; (4) the nonparty assumed
control over the litigation in which the judgment was issued; (5) a party attempted
to relitigate the issues through a proxy; and (6) a statutory scheme foreclosed
successive litigation by nonlitigants. 533 U.S. at 892–895. The Supreme Court in
Taylor, however, expressly rejected the virtual representation exception to the rule
against nonparty preclusion. Id. at 904.
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Subsequently, in Griswold v. County of Hillsborough, 598 F.3d 1289, 1293
(11th Cir. 2010), this Court affirmed the district court’s finding that Griswold was
in privity with two companies for which he was the president and sole shareholder
such that Griswold’s claims under 42 U.S.C. §§ 1981, 1983, and 1985 were barred
under the doctrine of res judicata by a previous judgment against the companies.
Although the district court had found that Griswold and the companies were in
privity because their interests were “so closely aligned” that the companies were
Griswold’s “virtual representative” in the previous litigation, Griswold, 598 F.3d at
1292, we did not affirm on that basis. This Court explained that “[i]n this Circuit,
‘[t]he doctrine of virtual representation provide[d] in essence that “a person may be
bound by a judgment even though not a party if one of the parties to the suit is so
closely aligned with his interests as to be his virtual representative.”’” Id. (second
and third alterations in original) (quoting EEOC v. Pemco Aeroplex, Inc., 383 F.3d
1280, 1287 (11th Cir. 2004)). We noted, however, that because the Supreme Court
in Taylor disapproved of the theory of virtual representation for purposes of federal
common law nonparty issue preclusion, “a court may no longer find privity based
solely on a similarity of interests.” Griswold, 598 F.3d at 1293. Nonetheless, this
Court affirmed the district court’s finding that Griswold was in privity with the
companies based on one of the established exceptions to the federal common law
rule against nonparty preclusion articulated in Taylor—that privity was established
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because Griswold assumed control of the litigation. Id. at 1292–93. Therefore,
unlike Alabama’s expansive view of privity, federal common law rules of issue
preclusion do not permit a finding of privity based solely on similar or closely
aligned interests, and therefore are not substantively similar to Alabama’s rule on
this particular question.
Given the above principles, the district court applied the incorrect legal
standard in determining whether Sellers and Sellers/Gardner were in privity. Here,
the district court applied federal rules of nonparty issue preclusion in determining
the preclusive effect of the declaratory judgment on Sellers/Gardner’s claim under
the direct-action statute. Specifically, the district court relied on Miller’s Ale House,
Inc. v. Boynton Carolina Ale House, LLC, 702 F.3d 1312 (11th Cir. 2012), a
trademark case arising under federal question jurisdiction and applying federal rules
of issue preclusion, and concluded that privity did not exist in the proper
configuration between Sellers, as assignee, and Gardner, as assignor. Because the
declaratory judgment action arose in diversity, however, the district court was
required to apply Alabama’s rules of nonparty issue preclusion in determining
whether privity existed between Sellers and Sellers/Gardner in the declaratory
judgment action. See Gen. Mills, Inc., 846 F.3d at 1340. Accordingly, because the
federal rules and Alabama’s rules of nonparty issue preclusion in this context are not
substantively similar, we hold that the district court applied the incorrect legal
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standard and thereby abused its discretion when it denied Nationwide’s motion in
limine.
IV. CONCLUSION
Because the district court applied the incorrect legal standard in denying
Nationwide’s motion in limine, we vacate the final judgment and remand for the
district court to apply Alabama’s rules of issue preclusion to determine the issue of
privity in the first instance. See id.at 1340 (“Whether parties were in privity is a
factual question that should be decided in the first instance by the district court.”);
see also Griswold, 598 F.3d at 1292 (stating that “whether a party is in privity with
another for preclusion purposes is a question of fact” (quoting Pemco Aeroplex, Inc.,
383 F.3d at 1285)). We express no opinion on the ultimate merits of Nationwide’s
argument as to privity.
VACATED and REMANDED for further proceedings consistent with this
opinion.