Maharaj v. Bankamerica Corp.

• Citation: 128 F.3d 94
• Decision Date: 17 October 1997
• Docket Number: D,No. 1265,1265
• Parties: Vikramchandra MAHARAJ, derivatively on behalf of InterQuant Capital Advisors, Ltd., and individually, Plaintiff-Appellant, v. BANKAMERICA CORP.; Bank of America National Trust and Savings Association; Security Pacific National Bank; Security Pacific Investment Group, Inc.; Bofa Capital Management Inc.; Robert H. Smith; Edward G. Hartman; J. Michael Gaffney; Arthur A. Fritz; Ann Y. Lau; Richard G. Wimbish; Christopher R. Helton; Katherine Wolking; Defendants-Appellees. Interquant Capital Advisors, Ltd., Nominal Defendant. ocket 96-7021.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 94

128 F.3d 94

Vikramchandra MAHARAJ, derivatively on behalf of InterQuant

Capital Advisors, Ltd., and individually, Plaintiff-Appellant, v. BANKAMERICA CORP.; Bank of America National Trust and Savings Association; Security Pacific National Bank;

Security Pacific Investment Group, Inc.; Bofa Capital

Management Inc.; Robert H. Smith; Edward G. Hartman; J.

Michael Gaffney; Arthur A. Fritz; Ann Y. Lau; Richard G.

Wimbish; Christopher R. Helton; Katherine Wolking;

Defendants-Appellees.

Interquant Capital Advisors, Ltd., Nominal Defendant.

No. 1265, Docket 96-7021.

United States Court of Appeals,

Second Circuit.

Argued May 8, 1997.

Decided Oct. 17, 1997.

Bernard Persky, New York City (Jonathan Gardner, Goodkind Labaton Rudoff & Sucharow LLP, New York City, of counsel), for Plaintiff-Appellant.

David B. Chenkin, New York City (John M. Wilson, Zeichner Ellman & Krause, New York City, of counsel), for Defendants-Appellees.

Before: FEINBERG, CARDAMONE, and LEVAL, Circuit Judges.

CARDAMONE, Circuit Judge:

Full of high expectations for success, plaintiff and defendants together formed a new business venture in which defendants took a majority stake and plaintiffs assumed managerial responsibility. Later, defendants determined to end the relationship and wind up the business. The reason advanced for terminating plaintiff was not, as one might expect, because of disappointed business expectations; but, rather because of plaintiff's alleged violation of defendants' personal code of conduct. The consequences of defendants' strong reaction to what they perceived to be plaintiff's personal misconduct reinforces the notion that passion conquers reason. That such proved to be the case here is reflected in plaintiff's favorable jury verdict in the breach of employment contract suit he brought against defendants.

Plaintiff Vikramchandra Maharaj appeals from a December 1, 1995 judgment of the United States District Court for the Southern District of New York (Cote, J.), dismissing his complaint. The district court ruled plaintiff's individual claims were barred by res judicata and that he was precluded from asserting derivative claims on behalf of InterQuant Capital Advisors, Ltd. under the doctrine of judicial estoppel. Plaintiff challenges both rulings on appeal.

BACKGROUND

Maharaj's complaint tells the following tale. In December 1987 he and defendant Security Pacific National Bank (Security Pacific or the Bank), founded a Delaware corporation named InterQuant Capital Advisors, Ltd. (InterQuant). InterQuant was formed for the purpose of providing investment advice using quantitative methods and proprietary software Maharaj had developed. The Bank provided 80 percent of the initial equity, and Maharaj contributed 20 percent. Maharaj was elected as a director and named President and Chief Executive Officer of the newly formed company pursuant to a five-year employment agreement. Maharaj and Security Pacific also signed a stockholders' agreement, which stated that in the event Maharaj's employment by InterQuant was terminated for any reason, InterQuant, the Bank, or certain of InterQuant's employees would have the option to buy Maharaj's shares.

In October 1989 defendant Security Pacific Investment Group, to which the Bank had transferred its interest in InterQuant, informed Maharaj that his employment was terminated as of October 4, 1989, purportedly for failing to abide by Security Pacific's code of conduct. On October 18 the InterQuant board, from which Maharaj had been removed following his firing, adopted a resolution stating that plaintiff's shares of InterQuant stock were worth $0. Notwithstanding Shortly after dismissing Maharaj, the defendants caused InterQuant to transfer all its assets to another corporation they owned named InterCash Capital Advisors, Inc. (InterCash). InterCash, using assets obtained from InterQuant and strategies and software InterQuant had developed, then proceeded to exploit business opportunities InterQuant had uncovered, deriving substantial revenue. InterQuant ceased operations, although it still remained in existence.

the repurchase option contained in the stockholders' agreement, at no time did InterQuant, Security Pacific, or any of InterQuant's employees offer to redeem or purchase plaintiff's shares.

In August 1990 Maharaj commenced an action (Maharaj I ) in the United States District Court for the Southern District of New York (Sweet, J.), seeking damages in his individual capacity from Security Pacific, Security Pacific Investment Group, InterQuant, and certain of their employees for (a) breaching his employment agreement when they terminated him without cause and (b) breaching their fiduciary duty to him as a minority stockholder by firing him on a pretext in an attempt to trigger the repurchase of his shares. The case proceeded to trial before a jury that returned a verdict in Maharaj's favor on the breach of employment cause of action, awarding him $390,000. The jury rejected plaintiff's breach of fiduciary duty claim.

In March 1993 after the complaint in the prior action had been filed, but before the case had gone to trial, defendants dissolved InterQuant by filing a certificate of dissolution with the State of Delaware. The certificate falsely stated that the dissolution had been approved by InterQuant's "sole" shareholder. Maharaj, who at that time was also a shareholder of InterQuant, was not given notice of the dissolution, and avers he did not learn of it until well after the conclusion of the first trial.

Plaintiff filed the present complaint in October 1994 alleging three individual causes of action: failure to give notice of dissolution of the corporation, conversion, and breach of the stockholders' agreement; and, on behalf of InterQuant, two derivative causes of action: demand for an accounting and breach of fiduciary duty.

Defendants moved pursuant to Rules 12(b), 23.1 and 9(b) of the Federal Rules of Civil Procedure to dismiss the plaintiff's complaint arguing that (i) the individual claims were barred by res judicata, (ii) plaintiff's claims to be a shareholder for purposes of the derivative claims should be judicially estopped, (iii) the failure to plead a valid reason for not making a Rule 23.1 demand on InterQuant's board of directors prior to bringing a derivative action barred such suit, (iv) the complaint failed to allege fraud with sufficient particularity to meet the requirements of Rule 9(b), (v) plaintiff's contention of entitlement to notice of dissolution under Delaware law was not viable because he was powerless to block that dissolution, and (vi) the derivative claims and conversion claims were time-barred.

The district court concluded that plaintiff's individual claims for conversion, wrongful dissolution and breach of stockholders' agreement were barred by the doctrine of res judicata because they could have been raised in Maharaj I. It further determined that although the derivative claims were timely brought, plaintiff was judicially estopped from claiming to be a shareholder for purposes of asserting them because portions of the jury instructions in Maharaj I appeared to suggest that he had taken a contrary position in the prior action. Finding adequate grounds to dismiss the complaint based on res judicata and judicial estoppel, the district court dismissed the complaint without addressing defendants' remaining arguments.

Maharaj appeals the dismissal of his complaint challenging both rulings. We reverse.

ANALYSIS

I Res Judicata

We review the district court's dismissal of plaintiff's complaint for failure to state a cause of action de novo, and in so doing accept as true all of the factual allegations contained in it. Plaintiff first urges that the doctrine of res judicata should not We begin by noting that the judgment in Maharaj I was rendered by a federal court sitting in diversity jurisdiction and that it is not altogether clear which law--state or federal--determines the effect of a judgment rendered in a diversity case on a subsequent diversity action. See Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d 343, 345 n. 1 (2d Cir.1995); Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 42 n. 3 (2d Cir.1986). In Gelb, we suggested that because state law controls the res judicata effect of state court judgments, federal courts should perhaps have similar power to determine the effect of federal judgments. Id. Thus far, however, we have not definitively resolved this issue, and we decline to do so on this appeal because federal and New York principles of res judicata and judicial estoppel lead here to the same result. See Harborside Refrigerated Servs., Inc. v. Vogel, 959 F.2d 368, 373 (2d Cir.1992); Chase Manhattan Bank, 56 F.3d at 345 n. 1.

be used to bar his individual causes of action for conversion, wrongful dissolution, and breach of the stockholders' agreement because each of these causes arose from events that occurred subsequent to the filing of the complaint in Maharaj I.

Under both New York law and federal law, the doctrine of res judicata, or claim preclusion, provides that "[a] final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have...