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Collateral Estoppel Not Applicable to $5,000,000 Judgment in Underlying Action (PA)

April 26, 2019

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<p style="text-align: justify;"><a href="">Kelly v. Carman Corporation</a> is an insurance litigation action initiated by Ronald and Patrice Kelly as assignees of BBK Tavern, Inc., which asserts negligence and breach of contract claims against Carman as BBK’s insurance broker in failing to notify BBK’s insurer of an underlying dram shop action.  The Kelly’s filed a complaint in the Philadelphia Court of Common Pleas, alleging that a $5,000,000 stipulated default judgment in the underlying dram shop action constituted the injury in the instant action.  In the underlying action, BBK Tavern never filed an answer to the plaintiff’s complaint, and default judgment was entered against it.  BBK’s attempts to open the default judgment were unsuccessful.</p>
<p style="text-align: justify;">In addition, BBK’s insurer obtained a declaratory judgment that it owed no duty to defend or indemnify BBK in the underlying dram shop case.  A damages hearing was held following the entry of default judgment and the Court entered a $5,000,000 judgment against BBK in the underlying action.  BBK then assigned its rights against its insurance broker, Carman, to plaintiffs in the underlying action and the instant action was filed by Ronald and Patrice Kelly.</p>
<p style="text-align: justify;">In the instant action, plaintiffs alleged that defendants acted negligently and in breach of contract when they failed to notify BBK’s insurer of the underlying dram shop action, resulting in a default judgment and $5,000,000 verdict against BBK.  Following trial, the jury returned a verdict in favor of plaintiffs; however, the Court entered a judgment notwithstanding the verdict in favor of defendants, holding that the negligence claims were time barred.  The Court also concluded that the previous hearing on damages was inadequate and ordered a new trial on the damages issue.</p>
<p style="text-align: justify;">On appeal, plaintiffs claimed that judgment should have been entered for $5,000,000 based on the default judgment from the underlying dram shop case.  The plaintiffs argued that the law of the case required the Court to enter judgment in this amount.  The Court, rejecting this argument, reasoned that although collateral estoppel could allow damages to be set based on an underlying proceeding, that concept did not apply here as defendants were not a party to the underlying dram shop proceeding.  The liability of defendants was not decided in the underlying proceeding as they were not a party to that case (in the underlying proceeding, BBK was the defendant).  The Court further reasoned that defendants in the instant action had no opportunity to litigate their defenses, and thus a manifest injustice would result of collateral estoppel applied to impose a $5,000,000 judgment on these defendants.  Collateral estoppel is only appropriate where a party, or one with him it is in privity, had the opportunity to participate in the earlier case.</p>
<p style="text-align: justify;">Thanks to Alexandra Perry for her contribution to this post. Please email <a href="">Vincent F. Terrasi</a> with any questions.</p>

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