Airfreight Express Ltd. V. Evergreen Air Center, Inc. – 5/21/2007

June 1, 2007

Arizona Court of Appeals Division Two Finds That Doctrine of Claim Preclusion Does Not Bar Party From Asserting Claims Dismissed Without Prejudice in Previous Action and That Party Could Not Challenge Sufficiency of Declarations on Appeal When It Failed to Move to Strike Declarations Below.

Airfreight Express Ltd. (“AFX”) and Evergreen entered into a settlement agreement to settle a dispute that arose under the parties’ aircraft maintenance agreement. AFX filed suit against Evergreen asserting multiple claims, including breach of both agreements. Evergreen counterclaimed for fraud, unjust enrichment, and breach of contract. Upon Evergreen’s motion to dismiss, the trial court dismissed AFX’s claims without prejudice and Evergreen prevailed on its breach of contract counterclaim after a bench trial. AFX filed the instant action within a week of the trial court’s ruling on Evergreen’s breach of contract counterclaim, alleging many of the same claims it had alleged in the first action, plus rescission of the settlement agreement on the basis of fraud, bad faith, duress, and a lack of consideration. Evergreen filed a motion to dismiss the claims raised in the second action, arguing that the doctrine of claim preclusion barred AFX’s claims. The trial court dismissed all but AFX’s claim for breach of the settlement agreement. Evergreen then filed a motion for summary judgment asserting the maintenance and settlement agreements barred AFX’s claim for lost profits caused by Evergreen’s alleged delay in completing aircraft repairs. The trial court granted the motion solely on the issue of the timely completion of the repair of the aircraft. The court entered a stipulated judgment agreed upon by the parties and this appeal followed.

The court of appeals found that the judgment in Evergreen’s favor in the first action did not bar AFX’s claims under the doctrine claim preclusion because the trial court had granted Evergreen’s motion to dismiss and dismissed AFX’s complaint without prejudice before entering judgment in the first action. Moreover, the doctrine of claim preclusion did not bar AFX from asserting claims in the second action that had been alleged as affirmative defenses in the prior action because affirmative defenses are not claims. The court noted that issue preclusion may have applied in this case, but Evergreen had waived issue preclusion by not raising it as a defense in its motion to dismiss and not asserting it on appeal as a valid basis for grant of that motion.

The court of appeals further found that the trial court erred in granting Evergreen’s motion for summary judgment, which had argued that the limitations of damages clause in the maintenance clause prevented AFX from recovering lost profits caused by an alleged delay in repairing the aircraft. The court adopted the rule that “A party may contract to limit liability in damages for nonperformance of promises…. Such a provision is not effective, however, if that party acts fraudulently or in bad faith.” AFX had presented signed but undated declarations, which alleged that Evergreen acted in bad faith so that its sister company could steal AFX’s business. The court noted that Evergreen had not moved to strike the declarations and therefore had waived on appeal any argument about their sufficiency. Based on the information found in the declarations, the court of appeals found that AFX had presented sufficient facts to preclude summary judgment on whether Evergreen performed the contract in bad faith.

Judge Brammer authored the opinion, joined by Judges Eckerstrom and Espinosa.