## Facts

- Plaintiffs bought a newly constructed home from defendants.
- Plaintiffs alleged defendants fraudulently misrepresented the quality of construction and the home’s location on the property, inducing the purchase at an inflated price.
- Plaintiffs first sued for rescission based on fraud and failure of consideration.
- In the rescission action, a general demurrer to the second amended complaint was sustained with leave to amend; plaintiffs did not amend, and judgment was entered for defendants for costs.
- Plaintiffs sought but were denied relief from that judgment under California Code of Civil Procedure § 473; no appeal was taken.
- About four months later, plaintiffs filed a new action seeking damages for fraud arising from the same transaction.
- Defendants asserted res judicata and obtained summary judgment in the damages action based on the prior rescission judgment and the denial of § 473 relief.

## Issues

1. Whether a prior judgment entered after a general demurrer is sustained with leave to amend, followed by the plaintiff’s failure to amend, bars a later action arising from the same transaction.
2. Whether claim preclusion applies when the demurrer ground supporting the prior judgment would not defeat the later action for fraud damages.

## Decision

- The California Supreme Court reversed the summary judgment for defendants.
- The Court held the prior rescission judgment did not bar the later action for fraud damages because the ground underlying the prior demurrer (laches) was not a ground that would defeat a legal damages claim.
- The case was allowed to proceed on the merits of the fraud damages theory.

## Legal Principles

- A judgment entered after a general demurrer is sustained with leave to amend and no amendment is filed is “on the merits” only to the extent it determines the pleaded facts fail to state a cause of action.
- Such a judgment bars a later action if (and only if) the prior demurrer rested on a ground equally applicable to the later action, even if the later pleading adds facts.
- If the defect that supported the prior demurrer would not justify sustaining a demurrer to the later complaint, res judicata does not bar the later action.
- Laches is an equitable defense applicable to rescission, and it does not ordinarily defeat an action at law for damages, which is governed by statutes of limitation.

## Conclusion

A dismissal following a sustained demurrer with leave to amend precludes later litigation only as to the legal deficiency actually determined; because the prior rescission dismissal rested on laches (an equitable bar not applicable to fraud damages), plaintiffs’ subsequent damages action was not barred by res judicata.


Keidatz v. Albany, 39 Cal. 2d 826, 249 P.2d 264 (Cal. 1952)