Petromanagement Corp. v. Acme-Thomas Joint Venture

• Decision Date: 06 January 1988
• Docket Number: No. 86-1012,ACME-THOMAS,86-1012
• Parties: The PETROMANAGEMENT CORPORATION, a Nevada corporation, Plaintiff-Appellant, v.JOINT VENTURE; and J.L. Thomas Engineering, Inc., an Oklahoma corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1329

835 F.2d 1329

The PETROMANAGEMENT CORPORATION, a Nevada corporation Plaintiff-Appellant, v. ACME-THOMAS JOINT VENTURE; and J.L. Thomas Engineering Inc., an Oklahoma corporation, Defendants-Appellees.

No. 86-1012.

United States Court of Appeals Tenth Circuit.

Jan. 6, 1988.

Jerry Kirksey of Lampkin, McCaffrey & Tawwater, Oklahoma City, Okl., for plaintiff-appellant.

Clyde A. Muchmore, John J. Griffin, Jr., and Harvey D. Ellis, Jr., of Crowe & Dunlevy, Oklahoma City, Okl., for defendants-appellees.

Before LOGAN, ANDERSON and TACHA, Circuit Judges.

LOGAN, Circuit Judge.

I Facts

In this appeal, we review the district court's dismissal of a diversity suit as barred by res judicata (claim preclusion). ¹ Canaden Petroleum Resources, Inc. (Canaden), the predecessor in interest to plaintiff-appellant, The Petromanagement Corporation (Petromanagement), entered into an oil and gas exploration option agreement by which it agreed to purchase from Acme Development, Inc. "up to twenty-eight" oil and gas leases in packages at a per lease price. Acme Drilling & Exploration Company was to drill under a turnkey drilling contract in the form and for prices set out in exhibits to the agreement. All wells drilled were to be operated by J.L. Thomas Engineering, Inc. (J.L. Thomas) under a model form operating agreement set out in another exhibit. Acme-Thomas Joint Venture (Acme-Thomas) agreed to take twenty-five percent of the working interest in each well and could earn another fifteen percent after pay out on the wells. Acme-Thomas, J.L. Thomas, and Canaden all signed the agreement. Subsequently five wells were drilled pursuant to the original option agreement, with separate turnkey and operating contracts signed for each well.

On May 17, 1984, Petromanagement brought its first action (Petro I ) against Acme-Thomas and J.L. Thomas in the United States District Court for the Western District of Oklahoma. The complaint referenced the option agreement and noted that under it Petromanagement was to receive seventy-five percent participation in a particular well, Pribil # 1, in return for its payment of $591,131.00, seventy-five percent of the turnkey costs. The complaint sought recision and restitution, alleging that Petromanagement had complied with the contract in all respects, but that the defendants had "wholly failed to meet their contractual obligations, including keeping the well free and clear of all liens." Complaint filed May 17, 1984, CIV-84-1242W (W.D.Okla).

On August 30, 1985, shortly before Petro I was scheduled to go to trial, Petromanagement filed the instant action (Petro II ) against the same defendants in the same court. In this action, Petromanagement referenced the individual contracts, "identical in all material respects" except name and property description, I R.Doc. 1 at 2, on each of the five wells, including Pribil # 1. This complaint, as amended, alleged Petromanagement's compliance with the contracts and defendants' breach as follows:

"Defendants fraudulently induced plaintiff to enter into the contracts and agreements set forth above, in that defendants misrepresented to plaintiff their intentions to operate the subject properties in a reasonable and workmanlike manner, and to abstain from unreasonable acts of self-dealing, and, in that defendants misrepresented to plaintiff the reservoir characteristics of all of the above described properties in an effort to induce plaintiff to enter into those agreements. Specifically, defendants falsely represented to plaintiff that these properties had significantly greater production capabilities than they, in fact, had, when defendants knew such representations to be false. Further, upon discovery of the natural limitations of those properties and reservoirs, defendants continued to falsely advise plaintiff as to said production capabilities of those properties and reservoirs in an effort to encourage and induce plaintiff to expend further sums of money in their development.

Defendants made these misrepresentations with knowledge of their falsity and with the intention that plaintiff rely thereupon. Plaintiff did rely and act thereupon to its detriment and injury."

I R.Doc. 6 at 5-6. This time Petromanagement sought actual and punitive damages as well as recision and restitution.

Petromanagement moved to consolidate the two actions on the grounds that the "actions involve common parties as well as common questions of law and fact," I R.Doc. 10, Ex. A at 1, and "grow out of the same nucleus of operative facts." Id. at 2. ² The district court denied the motion on the ground that consolidation would delay the trial. The court accordingly also denied plaintiff's motion to strike Petro I from the September 1985 trial docket. Plaintiff then, on September 9, 1985, filed a motion to dismiss Petro I without prejudice, which the district court denied at the beginning of the trial docket call on September 11. ³ Rather than go to trial in Petro I, Petromanagement stipulated to a dismissal with prejudice, which was filed on September 30, 1985.

A week later, defendants moved to dismiss Petro II on the ground of claim preclusion. Applying the federal law of res judicata, the district court found, "Based upon the plaintiff's admissions that these claims involve common parties and arise from a common nucleus of operative facts and upon plaintiff's contentions that these actions 'would be most conveniently tried in one proceeding,' and that 'separate trials of these cases would generate needless expense and needless demands upon the time and resource of all parties,' it is clear under the 'transactional' approach ... that Petromanagement II is barred." I R. Doc. 18 at 5-6 (citations omitted). We now review whether this dismissal was proper.

II Choice of Law

Petromanagement contends that Oklahoma law should govern the issue of claim preclusion under the doctrine of Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Our circuit has not resolved the question of whether state or federal claim preclusion law governs in successive diversity actions in federal court. The decisions of the district courts in this circuit have split. Compare Miller v. Johns-Manville Sales Corp., 538 F.Supp. 631, 632 (D.Kan.1982) (applying state res judicata law) with Fraley v. American Cyanamid Co., 570 F.Supp. 497, 499 (D.Colo.1983) (applying federal res judicata law). Viles v. Prudential Insurance Co., 124 F.2d 78, 81-82 (10th Cir.1941), cert. denied, 315 U.S. 816, 62 S.Ct. 906, 86 L.Ed. 1214 (1942), applied, without comment, federal res judicata law in circumstances like those facing us here. Federal Insurance Co. v. Gates Learjet Corp., 823 F.2d 383, 386 (10th Cir.1987), expressly left open the general question whether state or federal law should govern the preclusive effect of a federal diversity judgment.

Section 87 of the Restatement (Second) of Judgments (1982) (hereinafter Restatement ) establishes the following general rule: "Federal law determines the effects under the rules of res judicata of a judgment of a federal court." If the prior judgment of the federal court is based on federal law, then the application of this rule seems uncontroversial. See 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure Sec. 4468, at 617-21 (1981); Restatement Sec. 87 comment a. When the prior judgment of the federal court is based on state law, as in a diversity action, however, the application of federal preclusion law becomes more problematic. 18 C. Wright, A. Miller & E. Cooper, supra Sec. 4472. Nevertheless, the Restatement advocates applying federal preclusion law to determine the effect of a federal judgment, without making an exception for diversity cases:

"The rules of res judicata are not easily classifiable for purposes of determining whether a federal rule or a state rule should be used to determine a particular effect of a federal judgment. Some aspects of the rules of res judicata reflect primarily procedural policies. Thus, the basic rules of claim and issue preclusion in effect define finality and hence go to the essence of the judicial function. See Secs. 17-28. These should be determined by a federal rule."

Restatement Sec. 87 comment b, at 317. We think this approach is proper, at least insofar as the res judicata issue is not clearly substantive; and we adopt the "federal law controls" rule in this case.

In so ruling, we agree with several other circuits in applying federal preclusion law in successive diversity actions. See Harnett v. Billman, 800 F.2d 1308, 1312-13 (4th Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 1571, 94 L.Ed.2d 763 (1987); Aerojet-General Corp. v. Askew, 511 F.2d 710, 716-17 (5th Cir.), cert. denied, 423 U.S. 908, 96 S.Ct. 210, 46 L.Ed.2d 137 (1975); Silcox v. United Trucking Service, Inc., 687 F.2d 848, 852 (6th Cir.1982); Precision Air Parts, Inc. v. Avco Corp., 736 F.2d 1499, 1503 (11th Cir.1984), cert. denied, 469 U.S. 1191, 105 S.Ct. 966, 83 L.Ed.2d 970 (1985); see also Gelb v. Royal Globe Insurance Co., 798 F.2d 38, 42 n. 3 (2d Cir.) (advocating this position in dictum), cert. denied, --- U.S. ----, 107 S.Ct. 1608, 94 L.Ed.2d 794 (1986); contra Costantini v. Trans World Airlines, 681 F.2d 1199, 1201 (9th Cir.), cert. denied, 459 U.S. 1087, 103 S.Ct. 570, 74 L.Ed.2d 932 (1982). ⁴ This approach is favored by commentators as well. See, e.g., 18 C. Wright, A. Miller & E. Cooper, supra Sec. 4472, at 726; cf. 1B Moore's Federal Practice p 0.410 at 362 (1984).

While federal law is to govern as a general rule, comment b of Restatement Sec. 87 does contemplate federal law incorporating state law when, as with the concept of "privity," the issue is more distinctively substantive. Comment b at 317-18; see Federal Insurance Co., 823 F.2d at 386 (examining Georgia rule of privity to determine collateral estoppel effect of judgment); Hayles v. Randall Motor Co., 455 F.2d 169, 173 (10th Cir.19...