Baker Group v. Burlington Northern

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 99-3054
No. 99-3426
___________

The Baker Group, L.C., et al., *
*
Plaintiffs - Appellants, *
* Appeals from the United States
v. * District Court for the
* Western District of Missouri.
Burlington Northern and Santa Fe *
Railway Company, *
*
Defendant - Appellee. *
___________

No. 00-2215
___________

In Re: The Baker Group, L.C., et al., *
*
Petitioners. *
___________

Submitted: May 10, 2000

Filed: October 3, 2000
___________

Before BOWMAN, FLOYD R. GIBSON,1 and LOKEN, Circuit Judges.
___________

1
Complications from an automobile accident have prevented Judge Gibson from
reviewing this opinion prior to its being filed.
LOKEN, Circuit Judge.

In 1987, The Baker Group, L.C., and the MTY Profit Sharing Plan and Trust
(collectively “the Baker Group”) leased over 600 covered grain railcars to the
Burlington Northern and Santa Fe Railway Company (“BNSF”) for a lease term ending
October 31, 1997.2 Article 8 of the lease governed maintenance and modification of
the railcars during the term of the lease. Article 14 governed return of the railcars to
the Baker Group at the end of the lease. In March 1996, the Baker Group sued BNSF
in a Kansas state court for alleged breaches of Article 8. That lawsuit ended in a
judgment on the merits in favor of BNSF after the lease expired. In this case, the Baker
Group sued BNSF for breaches of Article 14, alleging that BNSF failed to return the
railcars in proper condition when the lease expired. The district court granted BNSF
summary judgment, concluding that the Baker Group’s Article 14 claims are barred by
claim preclusion (res judicata). The Baker Group appeals, challenging this and other
rulings. The parties agree that Kansas law governs. Applying that law, we conclude
that claim preclusion does not bar breach-of-contract claims that arose after the first
action was filed. Accordingly, we reverse in part.

I. The Claim Preclusion Issue.

“[A] federal court must give to a state-court judgment the same preclusive effect
as would be given that judgment under the law of the State in which the judgment was
rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). The
doctrine of claim preclusion under Kansas law bars a party from relitigating claims that
were litigated or could have been litigated in a prior suit. See In re Reed, 693 P.2d
1156, 1160-61 (Kan. 1985). The Kansas law of claim preclusion does not differ
significantly from federal law. See Stanfield v. Osborne Indus., Inc., 949 P.2d 602,

2
The lease was initially entered into by the parties’ predecessors-in-interest, but
that is irrelevant to the issues on appeal.

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608, 610-11 (Kan. 1997). Here, the critical issue is whether the Baker Group litigated
or could have litigated its Article 14 claims in the prior Kansas lawsuit.

Article 8 of the lease provides that, during the term of the lease, BNSF as lessee
must “maintain the cars in good condition and repair,” “not alter the physical structure”
of the cars without the Baker Group’s approval, and indemnify the Baker Group “for
all loss, damage and destruction of cars.” In the Kansas case, the Baker Group alleged
that BNSF breached Article 8 by modifying railcars and scrapping damaged railcars
without the Baker Group’s prior permission. In this case, the Baker Group alleges that
BNSF breached Article 14 of the lease, which provides that, within ten days after
expiration, BNSF must return each railcar --

free from residue, and in the same order and condition as it was delivered
by [the Baker Group] to [BNSF], except for and subject to ordinary wear
and tear and modifications permitted under this Agreement.

The Baker Group filed its Petition commencing the Kansas case in March 1996.
Obviously, no claim for breach of Article 14 could have been asserted at that time,
because BNSF was not obligated to return the railcars until the lease expired in October
1997. It is well settled that claim preclusion does not apply to claims that did not arise
until after the first suit was filed. See Florida Power & Light Co. v. United States, 198
F.3d 1358, 1360-61 (Fed. Cir. 1999), and cases cited. Thus, “[a] judgment in an action
for breach of contract does not normally preclude the plaintiff from thereafter
maintaining an action for breaches of the same contract that consist of failure to render
performance due after commencement of the first action.” RESTATEMENT (SECOND)
OF JUDGMENTS § 26, cmt. g (1982). The Supreme Court of Kansas applied these
principles in Gordon v. Consolidated Sun Ray, Inc., 352 P.2d 951, 953 (Kan. 1960),
holding that a separate cause of action for unpaid rent arose each month of a lease, and
the lessor “could not recover any deficiency until it had actually occurred.”

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 The Kansas case was tried on the merits one year after the lease expired.
Because the Baker Group’s Article 14 claims arose at expiration, BNSF argues they
could have been brought in the Kansas case and are therefore precluded in this case.
We disagree. Both rule 15(d) of the Federal Rules of Civil Procedure and its Kansas
counterpart, KAN. STAT. ANN. § 60-215(d), provide that the trial court may permit a
plaintiff to supplement its complaint with a cause of action arising after the original
complaint. The rule is permissive for the parties and discretionary for the court. Thus,
the Baker Group’s failure to supplement its already-commenced Kansas lawsuit did not
raise a res judicata bar that precludes a second suit based upon BNSF’s later conduct.
See Maharaj v. Bankamerica Corp., 128 F.3d 94, 97 (2d Cir. 1997).

BNSF next argues that the Article 14 claims are precluded because they were
actually litigated in the Kansas lawsuit. This contention requires a close look at the
Kansas proceedings. To put the inquiry in clearer focus, we begin by quoting a
relevant passage from the RESTATEMENT (SECOND) OF JUDGMENTS § 26, cmt. g:

In the event of a “material” breach . . . the plaintiff is entitled to treat the
contract as at an end and to recover damages for performances not yet
due as well as those already due on the theory that there has been a total
breach of contract. If the plaintiff does this, a judgment extinguishing the
claim under the rules of merger or bar precludes another action by him for
further recovery on the contract. On the other hand, although the breach
is material, the plaintiff may elect to treat it as being merely a partial
breach. If he so elects, he is entitled to maintain an action for damages
sustained from breaches up to the time of the institution of the action, and
the judgment does not preclude a further action by him for a breach
occurring after that date.

Immediately after commencing the Kansas lawsuit, the Baker Group moved for
a temporary injunction declaring the lease in default and ordering BNSF to return the
railcars “to contract shops for inspection and repairs under Article 14.” This remedy
is consistent with a claim of material breach, and had the Kansas court granted that

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injunctive relief, the lease would have been effectively terminated, and claims for
“performances not yet due” -- to use the above-quoted Restatement terminology --
would have been extinguished by the final judgment in the Kansas action. But the
Kansas court denied a temporary injunction, finding no threat of irreparable injury
primarily because BNSF’s continuing lease payments more than covered the Baker
Group’s monthly debt service. Thereafter, BNSF tried to force Article 14 damage
issues into the Kansas case. However, ignoring BNSF’s threat to invoke claim
preclusion in any later action, the Baker Group refused to amend its Kansas petition to
add Article 14 claims. Ultimately, at the Kansas trial, the court excluded evidence
relating to return of the railcars because those issues belonged in this Missouri lawsuit,
which by that time had been commenced.

The above-quoted Restatement commentary does not address this situation --
although the Baker Group attempted to declare a material breach and prematurely
terminate the contract, the Kansas court rejected that theory, forcing the Baker Group
to litigate its Article 8 claims as partial breaches. In these circumstances, what is
controlling for claim preclusion purposes, what the Baker Group tried to litigate in the
Kansas case, or what the Kansas court allowed it to litigate? The question would be
more clearly presented had the Baker Group brought a motion to add Article 14
damage claims on the eve of the Kansas trial, and the trial judge denied that motion for
discretionary, case-management reasons. But whether in that situation, or in this more
unusual procedural posture, we think Kansas law is clear -- “a judgment is not res
judicata as to any matters which a court expressly refused to determine, and which it
reserved for future consideration, or which it directed to be litigated in another forum
or in another action.” Jackson Trak Group, Inc. v. Mid States Port Auth., 751 P.2d
122, 128 (Kan. 1988) (emphasis added).

Therefore, we conclude the Baker Group’s later-accruing Article 14 contract
claims are not barred. The reason is not, as the Baker Group argues, that injunction
suits do not preclude later contract damage actions. An unsuccessful claim that

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includes a prayer for injunctive relief, if fully adjudicated on the merits, will bar a
second damage action based upon the same transaction or cause of action. See
Burnison v. Fry, 428 P.2d 809, 813 (Kan. 1967). For that reason, the Kansas case does
preclude Article 8 claims that were litigated, and any pre-existing contract claims that
could have been litigated, in that action. But it does not preclude the Baker Group’s
Article 14 claims because those claims arose subsequently and were never pleaded as
an additional cause of action in the Kansas case, and because the Kansas court refused
to permit them to be litigated at trial.

II. Challenges to Interlocutory Rulings.

On appeal, the Baker Group challenges a number of other district court rulings.
Because we are remanding this case for further proceedings on the Article 14 breach-
of-contract claims, these rulings are interlocutory in nature. We treat them accordingly.

A. An Issue Preclusion Ruling. In its final order dismissing the Article 14
claims as claim-precluded, the district court alternatively ruled that fourteen specific
issues were resolved in the Kansas lawsuit and may not be relitigated, invoking the
doctrine of issue preclusion or collateral estoppel. See generally Jackson Trak, 751
P.2d at 128; Grimmett v. S & W Auto Sales Co., 988 P.2d 755, 759 (Kan. App. 1999).
The Baker Group argues that the district court erred on all fourteen issues. At oral
argument, BNSF conceded that the combined effect of the fourteen rulings, if upheld,
would not completely bar the Baker Group’s Article 14 claims. Thus, these issue
preclusion rulings are, at this point in the case, interlocutory.

We have little doubt that issue preclusion does affect the Baker Group’s Article
14 claims. For example, the Kansas court rejected the Baker Group’s Article 8 gate
modification claim on the merits. Therefore, the Baker Group is barred from claiming
that BNSF breached Article 14 by returning cars with modified gates because Article

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14 allows the return of railcars with “modifications permitted under this Agreement.”3
Likewise, the Baker Group is barred by the Kansas judgment from claiming that BNSF
breached Article 14 by not returning the damaged cars it scrapped prior to lease
expiration. Beyond these rather obvious issues, we cannot anticipate how the issues
litigated in the Kansas action may affect the Baker Group’s claims in this case.
Accordingly, we decline to review the district court’s issue preclusion rulings, which
are interlocutory and subject to further consideration by that court.

B. Other Rulings. The Baker Group appeals a number of the district court’s
earlier rulings -- the dismissal of negligence, conversion, breach of duty, equity,
bailment, and non-Article 14 contract claims, and the court’s interpretation of a notice
requirement in Article 14. These rulings were interlocutory when made, they are once
again interlocutory in nature, and we decline to consider them at this time. We are
unwilling to risk interfering with the district court’s normal case management
prerogatives, including its discretionary power to reconsider interlocutory rulings at any
time before final judgment is entered.

III. The Baker Group’s Attack on the District Judge.

The Baker Group has filed a motion to expand relief on appeal and a petition for
an extraordinary writ urging us to reassign this case to another district judge on remand.
Applying the standards of judicial bias established by the Supreme Court in Liteky v.
United States, 510 U.S. 540, 555-56 (1994), we decline to do so.

3
The Baker Group argues that collateral estoppel does not apply because the
Kansas court ruled in the alternative that BNSF did not breach Article 8 and that the
Baker Group suffered no damage. We disagree. Collateral estoppel applies when a
litigated issue was necessary to support the judgment. See Jackson Trak, 751 P.2d at
128. Our review of the Kansas court’s decision persuades us that the court considered
its thorough analysis of the breach-of-contract issue necessary to support its judgment.

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 First, the Baker Group complains that the district judge brought pressure to bear
on plaintiffs to agree to binding arbitration, and then dismissed their claims on the
merits when they insisted upon their day in court. We have not asked the district judge
to respond to these allegations because, even if they were true, we are confident the
court on remand will abide by the Baker Group’s decision not to arbitrate its claims.

Second, the Baker Group complains because the district court’s final order
criticized counsel for “unprofessional and unethical conduct,” and the court sent a copy
of its order to the Office of the Chief Disciplinary Counsel for the State of Missouri.4
The district judge obviously has strong views on this subject, but they are based on his
judicial work on the case, not on an “extrajudicial source.” Therefore, we decline to
exercise our discretion to direct that the case be assigned to a different judge on
remand. Of course, that does not preclude the judge from deciding to recuse for any
reason, including “deep-seated and unequivocal antagonism that would render fair
judgment impossible.” Liteky, 510 U.S. at 556.

The judgment of the district court is reversed in part, the court’s order awarding
costs is vacated, and the case is remanded for proceedings not inconsistent with this
opinion. BNSF’s motion to dismiss is denied. The Baker Group’s Motion To Expand
Relief Sought on Appeal and Petition for Writ That This Case Be Reassigned upon
Remand are denied.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.

4
The referral was investigated, but no disciplinary charges were filed. The Baker
Group’s counsel on appeal, Dennis Owens, was not criticized by the district court.

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