The Court of Appeals Division One holds that neither an involuntary dismissal for failure to prosecute nor a stipulated discontinuance of an action on the same claim constitutes an adjudication on the merits having claim preclusion effect under the two-dismissal rule.

A couple jointly owned a manufacturing company. After their personal relationship ended, they agreed that the company would purchase one co-owner’s interest in the company. The company subsequently sold its assets without paying the co-owner, who then sued the company and her former partner in Maricopa County Superior Court. Default was entered against the company after it failed to answer, but the case was dismissed without prejudice for failure to prosecute before a default judgment could be entered. The co-owner filed a second and a third action in two other states, but those were later dismissed—the second action by stipulated discontinuance, and the third by voluntary dismissal.

The co-owner subsequently moved to reopen the Arizona case so that she could finish obtaining a default judgment against the company. The superior court granted the motion and entered judgment for the co-owner. However, the superior court later vacated the judgment as void under Ariz. R. Civ. P. 41(a) after finding that the dismissals of the co-owner’s other actions constituted an absolute jurisdictional bar to reopening the Arizona case. The co-owner appealed.

The Court of Appeals reversed and vacated the superior court’s order setting aside the judgment. Because the first voluntary dismissal of an action under Rule 41(a) is without prejudice, it usually lacks any preclusive effect because it is not an adjudication on the merits. The so-called “two-dismissal rule” provides an exception. Under the two-dismissal rule, if a plaintiff has already dismissed an action that is based on the same claim, including a voluntary dismissal in any court, the dismissal operates as an adjudication on the merits that bars the filing of a third action based on the same claim. The Court held that the two-dismissal rule did not apply to the co-owner’s attempt to reopen the Arizona case. The first dismissal (failure to prosecute) was an involuntary dismissal under Rule 41(b), but it was without prejudice and lacked preclusive effect. The second dismissal (stipulated discontinuance), also without prejudice, did not constitute a voluntary dismissal under Rule 41(a) because it was not a dismissal by the co-owner, so it too lacked preclusive effect. Therefore, the two-dismissal rule did not apply to third dismissal, which was the first and only dismissal by the co-owner.

Judge Brown authored the opinion; Judges Howe and Furuya joined.

Posted by: Matthew Stanford