Settlement bars indemnification claim

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Claim preclusion can bar a lawsuit between two parties who were both defendants in the prior action, even though no cross-claim was made.

Where one of the defendants asserted indemnification from the other as an affirmative defense, the Wisconsin Court of Appeals held on April 21 that the defense made the defendants “functional adversaries” in the first suit.

Arby Construction Inc. provided excavation and boring services under a contract with Wisconsin Public Service Corp., a gas and electric utility. The contact provided Arby would indemnify WPS for any liabilities WPS might incur as a result of the project.

Arby employees were working under the WPSC contract in July 2006 when they struck a gas line and caused an explosion, resulting in several injuries and two deaths.

The injured parties sued numerous entities, including Arby and WPS, as well as Associated Electric & Gas Insurance Services Limited, which insured WPS.

WPS filed a cross-claim against Arby, raising the indemnification issue. AEGIS did not file a cross-claim, but instead asserted indemnification by Arby as an affirmative defense to liability.

The parties ultimately settled the case with the plaintiffs, with Arby, WPS and AEGIS all paying confidential sums.

The settlement agreement provided as follows:

“1.  The … contractual indemnification claim asserted by Wisconsin Public Service Corporation against Arby Construction and its insurers, are dismissed without prejudice and without costs.

2.  This lawsuit, together with any and all claims set forth in the pleadings other than those referenced in paragraph one, above, is dismissed on the merits, with prejudice, but without costs.”

After settlement, WPS and AEGIS filed a new action seeking indemnification from Arby under the indemnification agreement for the amounts each had paid to settle the first action, and for the legal fees and expenses in defending that action.

Arby moved to dismiss AEGIS’s claim, asserting claim preclusion barred the action.

The circuit court agreed, and the Wisconsin Court of Appeals affirmed.

The court first concluded that it was not necessary for AEGIS to file a cross-claim against Arby in the prior action for claim preclusion to apply. The court explained, “Because a cross-claim is permissive, it would be an improper application of claim preclusion to bar a party from bringing a claim in a subsequent action solely because the party could have, but did not, file the claim as a cross-claim in a prior action.”

Second, the court found that the elements of claim preclusion were met.

AEGIS argued there was no identity of parties, because the affirmative defense of indemnification was pled against the plaintiffs in the first action, rather than against Arby.

But the court found that the substance of the indemnification defense was a claim against Arby.

Finally, because it was AEGIS who asserted the affirmative defense, the court found nothing unfair in treating it as a cross-claim.

“AEGIS itself asserted Arby’s liability under the indemnification agreement, albeit in the form of an affirmative defense,” the court said. “There is no unfairness to AEGIS in considering the substance of its own pleading.”

What the Court Held

Case:   Wisconsin Public Service Corp. v. Arby Construction Inc., No. 2010AP878.

Issue:   Can claim preclusion be applied based on an affirmative defense in a prior action?

Holding:          Yes. Where the substance of the affirmative defense in the prior action was a cross-claim, the doctrine can be applied.

Attorneys:       For Plaintiff: W. Thomas Terwiliger, Cassandra B. Westgate, Wausau; For Defendants: Charles P. Graupner, Reince R. Priebus, Aaron H. Kastens, Milwaukee.

David Ziemer can be reached at [email protected].