Weston Funding Corp. v. Lafayette Towers, Inc.

• Decision Date: 04 January 1977
• Docket Number: D,No. 123,123
• Citation: 550 F.2d 710
• Parties: WESTON FUNDING CORPORATION, Plaintiff-Appellant, v. LAFAYETTE TOWERS, INC. and George C. Peck, Defendants-Appellees. ocket 76-7190.
• Court: U.S. Court of Appeals — Second Circuit

Page 710

550 F.2d 710

WESTON FUNDING CORPORATION, Plaintiff-Appellant, v. LAFAYETTE TOWERS, INC. and George C. Peck, Defendants-Appellees.

No. 123, Docket 76-7190.

United States Court of Appeals Second Circuit.

Submitted Oct. 20, 1976.

Decided Jan. 4, 1977.

Albert B. Gins, New York City, for plaintiff-appellant Weston Funding corp.

Stanley Zucker, New York City (Kane & Zucker, New York City, on the brief), for defendants-appellees Lafayette Towers, Inc. and George C. Peck.

Before SMITH, OAKES and TIMBERS, Circuit Judges.

TIMBERS, Circuit Judge:

Plaintiff Weston Funding Corporation (Weston) appeals from a judgment entered March 11, 1976 in the Southern District of New York, Robert L. Carter, District Judge, 410 F.Supp. 980, which granted the motions of defendants Lafayette Towers, Inc. (Lafayette) and George C. Peck (Peck) for summary judgment and dismissed the complaint in a diversity action to recover real estate brokerage commissions. The district court held that plaintiff's action is barred on grounds of res judicata and collateral estoppel. We affirm.

I. FACTS

Weston is a New York corporation. It is licensed as a real estate broker in New York but not in New Jersey. Lafayette is a New Jersey corporation. Its sole shareholder is Peck, a New Jersey resident.

Weston originally commenced a diversity action against Lafayette and Peck in the District Court for the District of New Jersey on May 21, 1974. Weston alleged that Lafayette and Peck owed Weston brokerage commissions for its services in helping Lafayette obtain a bank commitment for loans for the financing of Lafayette Towers. Weston and defendants on November 1, 1973 had entered into an agreement which gave Weston the exclusive right and authorization for a period of seven days to obtain such loans. The agreement was extended orally at the end of the seven day period. After Weston obtained a written construction loan commitment from the First National State Bank of New Jersey, the parties signed a memorandum confirming Weston's right to a commission in amount of $191,250. After making a partial payment of $25,000 when the confirmatory memorandum was signed, defendants made no further payments. Weston alleged that defendants subsequently used the loan commitment it had obtained for them to obtain loans from other sources. Weston sued to recover the balance of the sum stated in the confirmatory memorandum.

Weston's complaint in the New Jersey federal court was dismissed on November 6, 1974 by James A. Coolahan, District Judge on defendants' motion for summary judgment. The ground of this decision was that New Jersey had closed the doors of its courts to suits for commissions by real estate brokers not licensed in New Jersey. ¹ Weston, concededly not so licensed, was held to be precluded from suing in the New Jersey federal court. Woods v. Interstate Realty Co., 337 U.S. 535 (1949); Angel v. Bullington, 330 U.S. 183 (1947); Erie Railroad v. Tompkins, 304 U.S. 64 (1938).

After filing a notice of appeal from the dismissal of its New Jersey action and then stipulating to a dismissal of its appeal (without any reservation of rights), Weston commenced a new action in the District Court for the Southern District of New York on March 17, 1975, alleging substantially the same causes of action as in the prior New Jersey action. In dismissing the complaint in the instant Southern District action, after answers had been filed, Judge Carter held that the prior judgment in the New Jersey federal court was a bar to the second action on the ground of res judicata. He also held that the doctrine of collateral estoppel would bar Weston from relitigating the question of the applicability of New Jersey's "door-closing" statute even if Weston were not barred by res judicata from maintaining the second action in the Southern District.

Weston appeals from the judgment entered pursuant to Judge Carter's opinion, claiming (1) that its Southern District action is not barred on the ground of res judicata; (2) that Weston is not barred by collateral estoppel from claiming that N.J.S.A. § 45:15-3 does not close the doors of a New York federal court; and (3) that, even if Weston is barred from suing on its contract claim, it still has a good cause of action in quantum meruit.

Since we find no merit in any of these claims and we agree with Judge Carter's decision, we affirm.

II. RES JUDICATA

Weston advances two arguments to avoid the res judicata effect of the prior judgment. First, it argues that the instant action is based on the agreement of November 1, 1973 which was executed in New York, whereas the New Jersey action was based on the subsequent memorandum signed by Peck on behalf of himself and Lafayette at a meeting in New Jersey. ² Weston maintains that the two agreements give rise to completely independent causes of action. In its brief before us Weston points out that the November 1 contract "which was extended by the oral agreement of the parties was not before the court in the New Jersey action" and that the recovery sought in the earlier action was based on the confirmatory memorandum which, unlike the November 1 agreement, did not "constitute a contract". The district court below correctly rejected this attempt to convert components of one agreement into separate agreements on which separate causes of action could be based:

"It is clear that the letter of February 25, 1974 merely provided a precise calculation for the formula already agreed upon, as evidenced by the agreement of November 1, 1973. Regardless of whether plaintiff chooses to sue with respect to a document that sets forth the precise terms of his agreement with the defendants, or with respect to a later executed document which reflects in dollar figures the same terms as were initially agreed upon, plaintiff's cause of action remains the same." 410 F.Supp. at 983 n.4.

Second, Weston argues that the prior adjudication was not "on the merits" and therefore cannot be res judicata. We agree with the district court that the New Jersey judgment was an adjudication on the merits. ³ 410 F.Supp. at 986.

It would serve no useful purpose to catalogue the types of judgments that have been considered to be "on the merits" or otherwise. The American Law Institute has abandoned use of the term "because of its possibly misleading connotations," Restatement (Second) of the Law of Judgments § 48, at 36 (Tent. Draft No. 1, 1973). The general rule under the traditional terminology is that a judgment is on the merits if it completely disposes of the underlying cause of action, Cromwell v. County of Sac, 94 U.S. 351 (1876), or "determines that the plaintiff has no cause of action," Restatement of the Law of Judgments § 49, comment a at 193 (1942). Its effect is that of "an absolute bar to a subsequent action." Cromwell v. County of Sac, supra, 94 U.S. at 353. On the other hand, traditionally "(a) judgment for the defendant (was) not on the merits where it (was) based merely on rules of procedure rather than on rules of substantive law." Restatement of the Law of Judgments, supra, § 49, comment a at 193.

The more modern view, as expressed in the Tentative Draft of Restatement (Second), supra, and the Federal Rules of Civil Procedure, expands the category of judgments that will be considered res judicata to include dismissals on other than traditionally "substantive" grounds. See Fed.R.Civ.P. 41(b); Reporter's Note, Restatement (Second), supra, § 48, at 42-43. This view reverses the presumption that a judgment for the defendant on a demurrer or motion to dismiss normally does not bar a second action on the same claim. Rule 41 provides that such a judgment in a federal court, unless within one of the enumerated exceptions to the Rule, operates as an adjudication on the merits unless otherwise specified. ⁴

It is true that summary judgment was granted in the New Jersey action necessarily before "the defendant (had to) incur the inconvenience of preparing to meet the merits" of Weston's claim at trial. Costello v. United States, 365 U.S. 265, 286 (1961). The Supreme Court in Costello focused on that consideration as a central factor in the determination of whether a dismissal is for lack of jurisdiction, one of the enumerated exceptions to the general rule, and therefore not on the merits.

But there are other critical factors to consider in determining whether a dismissal is on the merits. The primary one here is whether the court's reason for dismissal was that plaintiff had no cause of action. In Costello the dismissal was for failure of the government to file an affidavit of good cause in a denaturalization proceeding; that failure did not destroy the underlying cause of action but simply constituted non-fulfillment of a prerequisite to the initiation of the proceedings. 365 U.S. at 268.

In contrast, N.J.S.A. § 45:15-3 is intended to bar creation of the debt, not merely to create a precondition to suit. ⁵ It is not a jurisdictional or procedural provision, see Szantay v. Beech Aircraft Corp., 349 F.2d 60, 63-64 (4 Cir. 1965), but an expression of a significant substantive policy of the state. Stahl v. Township of Teaneck, 162 F.Supp. 661, 667-69 (D.N.J.1958). In applying the New Jersey statute to close its doors to a suit by an unlicensed broker, the Stahl court said:

"It is evident . . . from the legislative language and its construction by the courts of New Jersey, that the Act is a strong expression of public policy. It comes well within a reasonable exercise of the police power of the State to protect the public from fraud, misrepresentation, incompetence and sharp practice." Id. at 669.

The provision is part of a regulatory scheme that makes it illegal to engage in any unlicensed brokerage activity in New Jersey. ⁶

There may be a distinction between the question on the one hand whether a state statute is "substantive" and therefore to be applied by a federal court in a diversity action and on the...