Stovall v. Price Waterhouse Co.

• Citation: 652 F.2d 537
• Decision Date: 05 August 1981
• Docket Number: No. 80-3416,80-3416
• Parties: Robert C. STOVALL, Jr., et al Plaintiff-Appellants, v. PRICE WATERHOUSE CO., et al Defendants-Appellees. . Unit A
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 537

652 F.2d 537

Robert C. STOVALL, Jr., et al Plaintiff-Appellants, v. PRICE WATERHOUSE CO., et al Defendants-Appellees.

No. 80-3416.

United States Court of Appeals, Fifth Circuit.

Unit A

Aug. 5, 1981.

Robert C. Stovall, Jr., pro se.

Allan W. Perry, Jackson, Miss., Thomas F. Ging, Chicago Ill., for appellees.

Appeal from the United States District Court for the Northern District of Mississippi.

Before BROWN and GARZA, Circuit Judges, and CHARLES SCHWARTZ, Jr. ^*, District Judge.

CHARLES SCHWARTZ, Jr., District Judge:

This appeal is hopefully the final chapter of a long and involved litigation. Its roots lie in a 1969 merger between the Columbus & Greenville Railway Company (Columbus & Greenville) and the Illinois Central Gulf Railroad (Illinois Central). Plaintiffs-appellants Robert C. Stovall, Jr., et al. (Stovall) ¹ were Columbus & Greenville shareholders, and the merger planned called for them to receive Illinois Central stock in exchange for tendering their Columbus & Greenville shares. The exact amount of Illinois Central stock to be given for a share of Columbus & Greenville stock was to be determined by the financial condition of the latter railroad on the effective date of the merger, and that financial condition in turn was to be ascertained by an audit conducted by an independent firm of certified public accountants.

Defendant-appellee Price Waterhouse & Company (Price Waterhouse) ² is the accounting firm retained to perform the audit in accordance with the merger agreement. Stovall initially agreed to the selection of Price Waterhouse but later withdrew their approval and, by their failure to cooperate with it, rendered the firm incapable of completing the audit. Further, Stovall refused to accept certain adjustments to shareholders' equity proposed by Price Waterhouse pursuant to a series of status reports prepared during the course of the attempted audit. Thereupon, Illinois Central, having been unable to resolve the differences with the Columbus & Greenville shareholders, in June 1974 filed a suit (the Illinois Central litigation) founded on diversity jurisdiction in the Northern District of Mississippi seeking declaratory relief against the former shareholders. Among the issues involved in that case were Price Waterhouse's competency to serve as an independent accountant and the appropriate equity to be assigned to the shareholders of Columbus & Greenville. Stovall answered and counterclaimed, asserting claims under state law and the Securities Exchange Act of 1934. Approximately nine months after the complaint was filed Stovall moved to add Price Waterhouse as an additional party to that litigation; Illinois Central opposed, and the motion was denied.

That case proceeded to trial before Judge Orma R. Smith, and during the trial the individual Price Waterhouse personnel who are made defendants in these proceedings and a third representative of the firm, James E. Goodwin, each testified and were extensively cross-examined. On December 16, 1976, Judge Smith entered his findings of fact and conclusions of law; the propriety of Price Waterhouse's services as an independent auditor was an issue properly before him for consideration at that time.

Judge Smith ruled in pertinent part:

3. The court finds that the audit performed by Price Waterhouse and Co. was an audit of a "firm of independent certified public accountants of national reputation" as called for by the Agreement and Plan of Merger and particularly Paragraph IV(d) thereof.

4. The court finds that the audit performed by Price Waterhouse & Co. was performed in accordance with the "Uniform System of Accounts for Class II Line-Haul Railroad Companies prescribed by the (Interstate Commerce) Commission at December 31, 1967.

5. The court finds that neither Price Waterhouse & Co., IC Industries [a related company and co-plaintiff of Illinois Central], nor Illinois Central Gulf Railroad Company colluded or conspired to defraud, deceive or mislead the defendants.

6. The court finds that Price Waterhouse & Co. conducted its audit in a fair, unbiased, and independent manner.

7. The court finds that Price Waterhouse & Co. conducted its audit in accordance with generally accepted auditing standards.

8. The court finds that the accounting principles applied by Price Waterhouse & Co. are supported by substantial authoritative literature and are in accordance with generally accepted accounting principles and the Uniform System of Accounts.

No party appealed from the final decision in that case.

In 1977, some nine months after the commencement of the Illinois Central litigation and on the same day Stovall sought to join Price Waterhouse as a party in that suit, Stovall filed their original complaint in this cause (the Stovall suit) which was also assigned to Judge Smith. Defendants in this case, in addition to Price Waterhouse, were Aiden Mullett and Robert Marzec, employees of Price Waterhouse.

The trial court granted a motion by Price Waterhouse to dismiss the Stovall suit, based largely upon the reasoning that the issues presented by this new complaint were identical to the issues raised in the Illinois Central suit and that the issues raised as to the Price Waterhouse defendants were prematurely stated and should not be pursued until the Illinois Central litigation had been concluded. Therefore the order of dismissal was without prejudice to subsequent refiling after resolution of the Illinois Central suit. Stovall appealed the dismissal of this suit and then moved for a stay of their appeal. Subsequently, the stay was lifted and the case was set for oral argument in April of 1979. However, by the time the appeal of the Stovall suit was finally argued the Illinois Central litigation had been resolved. Another panel of this Court ordered the dismissal of the Stovall suit vacated and remanded the case to the district court to allow Stovall the opportunity to amend their complaint and proceed accordingly. Stovall's amended complaint, like the original complaint, was based upon diversity of citizenship alleging a cause of action pursuant to Mississippi law and upon an alleged violation of the Securities & Exchange Act of 1934. Upon the filing of the amended complaint Price Waterhouse moved for summary judgment on the basis of collateral estoppel, arguing that the Illinois Central litigation had resolved adversely to Stovall all the fact questions posed by the amended complaint. Price Waterhouse also moved the Court to require Stovall to pay for its costs, including attorneys' fees, because it alleged Stovall's claims against it were completely without merit and were asserted frivolously, vexatiously, oppressively, and in bad faith.

Stovall filed voluminous responsive documents in opposition to the motion for summary judgment, including a "suggestion" that Judge Smith recuse himself because he had earlier held in the Illinois Central litigation that Stovall (at least in some sense) had acted "in bad faith, vexatiously, wantonly or for oppressive reasons." Thereafter, Judge Smith transferred the case to Chief Judge William C. Keady. Chief Judge Keady held that the federal rule of collateral estoppel was the appropriate one to apply. Because he found that the issues involved in the Stovall suit were identical to the ones fully, properly, and necessarily litigated in the Illinois Central suit, he granted the motion for summary judgment. With respect to the claim for attorneys' fees, he further found that "Stovall's continued maintenance of the case sub judice was a vexatious prolongation of a controversy already resolved," and subsequently, based on affidavits, awarded Price Waterhouse attorneys' fees and expenses in the amount of $20,681.20.

Stovall urges that the trial court erred in looking to the federal, rather than to the Mississippi, standard to determine collateral estoppel. Stovall's reasons for doing so are quite understandable; Mississippi law requires a showing of privity of a kind which is not present here before parties such as Stovall may be estopped from urging a claim in a later litigation. Ditta v. City of Clinton, 391 So.2d 627 (Miss. 1980), as modified on denial of rehearing, id. (Miss. 1981); Sanders v. Mississippi, 242 So.2d 412 (Miss. 1970). Mississippi law in this area has been characterized as being rigid as any now extant. Note, Collateral Estoppel the Multiple Tort Claimant Anomaly, 41 Miss.L.J. 497, 498 (1970).

Federal collateral estoppel rules, on the other hand, allow invocation and imposition of the doctrine upon the showing of three necessary criteria:

1) that the issue at stake be identical to the one involved in the prior litigation;

2) that the issue have been actually litigated in the prior litigation; and

3) that the determination of the issue in the prior litigation have been a critical and necessary part of the judgment in that earlier action.

Johnson v. United States, 576 F.2d 606, 615 (5th Cir. 1978); see Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979).

Thus, it is clear that a determination of whether the federal or the Mississippi standard relative to collateral estoppel is to be applied in this case determines the disposition of the motion to dismiss. Chief Judge Keady found, and the record amply supports his conclusions, that the requirements for federal collateral estoppel were met by the determination of the relevant facts in the earlier litigation. If, however, the Mississippi rule were the proper one, there could be no...