First District Court of Appeal Analyzes Claim Splitting in the Context of Unlawful Detainer Rent Demand and Damages versus Past-Due Contract Rent in Hong Sang Market, Inc. v. Peng (2018)

“Accordingly, we hold that an unlawful detainer judgment awarding back-due rent does not preclude a lessor from seeking additional back-due rent in an ordinary civil action. However, the lessor is precluded from recovering back-due rent associated with a particular time period in the subsequent civil action if such a claim was actually determined on the merits in the unlawful detainer action. Thus, the lessor is not only precluded from recovering twice for the same items of damages but also may not renew a claim for back-due rent associated with a particular time period if that periodic claim was denied on the merits in the unlawful detainer action.”

Hong Sang Market, Inc. v. Peng (2018) tracks multiple years and multiple lawsuits, with a building owner, master tenant and subtenant battling over money judgments, unpaid rent, unlawful detainer damages and various awards of attorneys’ fees. For landlord-tenant practitioners, it provides a crucial analysis of the doctrine of res judicata, in the context of unlawful detainers based on the non-payment of rent, contract damages for non-payment of rent, and the holdover damages incidental to unlawful detainers.

Hong Sang is the owner of a commercial building. It leased to Ming Kee Game Birds, Inc., which then subleased to Vivien Peng. Ming Kee sued Peng for breach of the sublease, but Peng cross-complained against Ming Kee, obtaining a money judgment that she began to collect in the form of offsets to her rental payment obligation. However, Ming Kee and Hong Sang agreed to terminate the master lease, and a new tenant – Ming’s Poultry, LLC – assumed the master lease and began operating Ming Kee’s former business.

Understandably, Peng viewed this as a fraudulent conveyance designed to prevent her from collecting on the unsatisfied judgment, via setoff of rent owed under the sublease. Peng apparently objected to the swapping out of the new master lessor and somehow became Hong Sang’s tenant directly in the process. While unclear from the opinion, Peng may have attempted the same offset against the property owner, who filed an unlawful detainer for non-payment of rent, but dismissed about a year and a half later, given an arguable defect in the notice to quit. Hong Sang then changed the terms of Peng’s lease to add an attorneys’ fee provision.

Peng paid rent for a couple of months, but then fell delinquent for May of 2011. Hong Sang served a notice to pay rent for May or quit (but also expressly reserved the right to collect rent from before March in a separate action). Peng didn’t cure, Hong Sang filed an unlawful detainer, and in September 2011, the trial court granted summary judgment in favor of Hong Sang for possession of the premises and the rent for May. Peng didn’t appeal, and the judgment became final.

Hong Sang filed a separate action for breach of contract to collect the previous years worth of rent. “Before trial, Peng filed a motion for judgment seeking to dismiss the breach of contract cause of action on the ground that it was barred by the doctrines of res judicata and collateral estoppel.” She argued that Hong Sang was trying to recover previous years’ rent in the present action, but the previous unlawful detainer lawsuit already litigated the single cause of action for back-due rent.

The Court of Appeal concluded that this was not claim splitting. To do so, it had to traverse the doctrines of res judicata and primary rights theory. Res judicata “gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy”. Meanwhile, “California courts apply the ‘primary rights’ theory in assessing whether two proceedings involve identical causes of action”, which is defined as “the right to be free from a particular injury, regardless of the legal theory on which liability for the injury is based”. This means that “the claim preclusion aspect of the res judicata doctrine generally bars a second action brought solely to recover greater or different damages”.

The Court gave careful consideration to Peng’s position, noting that, “At first blush, Peng’s argument appears meritorious. After all, Hong Sang sought accrued and unpaid rent in two different actions, albeit for different time periods.” However, it concluded that the claims relating to back due rent were “split” between very different proceedings – a general civil lawsuit (where Peng had filed a cross-complaint) and a summary unlawful detainer proceeding, which disallows defenses and cross claims unless they relate to the singular issue of possession of the premises.

This makes sense, because, in an unlawful detainer for non-payment of rent, the landlord is limited by statute to recovering only one years’ worth of rent – the unlawful detainer court lacks jurisdiction to award more than that. But the statute of limitations for breach of a written lease is four years.

The court found further support in statutory authority (Cal. Civ., §1952) stating that landlords could bring separate actions for unpaid rent, so long as it was not cumulative to unlawful detainer damages, as well as the decision Northrop Corp. v. Chaparral Energy, Inc. (1985) 168 Cal.App.3d 725, where the court of appeal modified an unlawful detainer judgment for possession to permit recovery of damages, when the lessor expressly reserved its right to collect them, seeking possession only in the unlawful detainer action.