DuBroff v. DuBroff

Decision Date08 December 1987
Docket NumberNo. 86-2798,86-2798
Parties, RICO Bus.Disp.Guide 6820 Constance I. DUBROFF, et al., Plaintiffs-Appellants, v. Duncan D. DUBROFF, et al., Defendants, Don M. Kennedy, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Charles W. Getman, Robert N. Hinton, Houston, Tex., for plaintiffs-appellants.

D. Gibson Walton, D. Ferguson McNiel, Vinson & Elkins, Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before GEE and JOHNSON, Circuit Judges. *

GEE, Circuit Judge:

Constance DuBroff and her wholly-owned corporation Sedergo Unlimited, Inc. sued her former husband Duncan DuBroff, his wholly-owned corporation DuBroff Energy Corporation, several of his business associates and his lawyers in federal district court. Mrs. DuBroff alleged that the defendants conspired to defraud and in fact defrauded her of community property in the course of a divorce settlement. She alleged that their actions violated federal securities laws and regulations, see 15 U.S.C. Sec. 78j(b) and 17 C.F.R. 240.10b-5, as well as federal racketeering statutes, see 18 U.S.C. Sec. 1961 et seq.

During their marriage, Mr. and Mrs. DuBroff each held 50% of the stock of DuBroff Energy Corporation ("DEC"). DEC bought, managed and explored for various oil, gas and mineral interests. At the time of their divorce, Mr. and Mrs. DuBroff agreed to split the assets of DEC between two corporations: Duncan DuBroff would own 100% of DEC, and Constance DuBroff would own 100% of Sedergo, a new entity created for the purpose. The transaction was structured like this: Sedergo was formed and it issued 100% of its capital stock to DEC in exchange for approximately half of DEC's assets. DEC then transferred all of Sedergo's stock to Constance DuBroff in exchange for all her holdings in DEC. As a result, Duncan DuBroff ended up owning all of DEC, which in turn held about half of its original assets; Constance DuBroff ended up owning all of Sedergo, which in turn owned about half of DEC's original assets. This transaction closed in December 1982 and the divorce decree incorporating the property settlement was entered in January 1983 in Montgomery County District Court.

After the divorce, Sedergo's participation in continuing or new ventures with DEC and other business partners did not go smoothly. The parties accuse each other of various misdoings irrelevant to the case as it comes before us, but at least two of the predicate RICO acts are alleged to have occurred after the closing of the property settlement in December 1982 and the incorporation of the settlement into the divorce decree in January 1983. At some point, Constance DuBroff decided that she had been deceived: that her ex-husband had lied to her, concealing various corporate opportunities of DEC under the guise of entities of whose existence she was unaware at the time of the divorce.

In consequence Mrs. DuBroff brought this suit, alleging that the property settlement transaction included a fraudulent scheme in connection with the sale of securities in violation of federal law and that the various defendants had violated RICO by predicate acts of mail, wire and state-law fraud. After long delays in the federal motions practice, she sought a bill of review in the Montgomery County District Court on the basis of alleged "extrinsic" fraud in the divorce settlement. She then settled with most of the defendants--her ex-husband, several business partners and associates, DEC, and other corporate entities--in exchange for her voluntary dismissal with prejudice of both state and federal proceedings against them. As a result, only her husband's lawyers and their firm (the "lawyer defendants") remain as defendants (and appellees) in this case. Eventually, the trial court dismissed this case as res judicata because "the actions complained of were all approved by a Texas state court in a divorce decree...." Mrs. DuBroff and her corporation appeal.

Texas Law: Fraud and Res Judicata

"It is now settled that a federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the state in which the judgment was rendered." Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56 (1984); see also A.L.T. Corp. v. Small Business Administration, 801 F.2d 1451 (5th Cir.1986) (discussing "full faith and credit" statute 28 U.S.C. Sec. 1738). Therefore, we look to Texas law to see if Constance DuBroff can avoid the binding effect of the divorce decree.

Texas courts do not always apply res judicata with great strictness to second claims raising a new allegation of fraud. For example, in Jeanes v. Hamby, 685 S.W.2d 695 (Tex.App.--Dallas 1985, writ ref'd n.r.e.), the plaintiff won judgment in an earlier suit against the defendants as guarantors of certain notes but had tremendous difficulty collecting his judgment. In this case, he alleged a "continuing fraudulent conspiracy by appellees [defendants] to assure that he would never recoup his money in the form of continuing actions by appellees to prevent collection of his judgment." The fraudulent conspiracy was alleged to have begun before and continued after the first judgment. After reviewing two cases that construed res judicata rather narrowly, the Texas court concluded:

[W]e hold that even though [plaintiff] Jeanes' cause of action for fraudulent conspiracy arose from some of the same events which gave payment on the note, the two causes of action depend upon the determination of altogether different factual and legal questions and are sufficiently distinct so as to prevent the doctrine of res judicata from precluding Jeanes' suit.

Jeanes, 685 S.W.2d at 699. It is apparent that Jeanes supports Mrs. DuBroff's theory in this case.

On the other hand, earlier cases emphasize the distinction between "intrinsic" and "extrinsic" fraud. Fraudulent misbehavior by a party to a prior suit cannot be successfully attacked if the fraud was "intrinsic," i.e., part of the fraudfeasor's actions in the context of the earlier dispute or the suit itself. See, e.g., Alexander v. Hagedorn, 148 Tex. 565, 226 S.W.2d 996 (1950) (false statements made by plaintiffs to trial judge in prior default proceeding were intrinsic fraud that could not be used by defendant to upset the judgment in a bill of review proceeding); see generally Browning v. Navarro, 826 F.2d 335 (5th Cir. 1987) (discussing intrinsic/extrinsic fraud distinction). Moreover, when--as in this case 1--the parties have reached a settlement or "agreed judgment" that explicitly waives any and all other claims, the Texas courts have not been receptive to a second attack. In Vartanian Family Trust No. 1 v. Galstian Family Trust, 724 S.W.2d 126 (Tex.App.--Dallas 1987), for example, the parties settled the prior action with a broad agreement covering "all claims, known or unknown." The court held that a claim of preexisting fraud discovered only after settlement is not enough:

The fraud asserted to have been discovered by the Vartanians after the June 1981 judgment does not vitiate the res judicata effect of that order. See McRae v. Turner, 626 S.W.2d 351, 352 (Tex.App.--Fort Worth 1981, no writ). As stated in McRae, 626 S.W.2d at 352, "... [the] judgment otherwise persists [as] res judicata until set aside; and it cannot be attacked or set aside by any method save the exclusive remedy provided by bill of review. McEwen v. Harrison, 162 Tex. 125, 345 S.W.2d 706 (1961)." Although fraud is a ground for setting aside an agreed judgment, the other requirements for a bill of review, not alleged here, must also be alleged and proved.

Vartanian Family Trust, 724 S.W.2d at 128 (bracketed material in original).

In addition--although the parties do not cite them--our research reveals a number of Texas cases that deal directly with allegations of fraud in a divorce settlement. In Chapman v. Chapman, 591 S.W.2d 574 (Tex.App.--Fort Worth 1979, no writ), for example, the ex-wife brought a bill of review challenging the divorce property settlement. She claimed fraud in her ex-husband's valuation of their former community. The court held that the fraud, if present at all, was intrinsic, not extrinsic, and thus did not escape the rule of res judicata:

The divorce decree in the instant case is very similar [to the decree in Bankston v. Bankston, 251 S.W.2d 768 (Tex.Civ.App.--Dallas 1952, mand. overr.) ] as it embodied a property settlement agreement which was based on valuations of community property, most of which were ongoing as in Bankston, the husband had provided the wife with the material information of the value and nature of these concerns; and it was this information on which the wife relied in agreeing to the property division.

* * *

* * *

In order to vacate the judgment, the wife must fail unless she can show extrinsic fraud. As in Bankston, 251 S.W.2d 768, 772, the fraud alleged at most relates to untruths which misled the wife into acquiescence and approval of an unjust division of property. Furthermore, assuming presentment that misrepresentations were made by the husband upon which the wife relied, the misrepresentations obviously bore only on matters at issue in the former trial (or which could have been at issue on that trial) and therefore amounted to no more than intrinsic fraud.

Chapman, 591 S.W.2d at 576, 577. See also McRae v. Turner, 626 S.W.2d 351, 352 (Tex.App.--Fort Worth 1981, no writ) (claim by ex-wife that ex-husband fraudulently induced her to agree to property settlement by giving false valuation of certain retirement benefits; held: divorce settlement can be challenged only by bill of review; ex-wife unlikely to succeed in bill of review because her allegations are of intrinsic fraud only and Chapman v. Chapman controls). Like the ex-spouses in Bankston, Chapman, and McRae, ...

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