Arab African Intern. Bank v. Epstein
| Decision Date | 30 November 1993 |
| Docket Number | Nos. 92-5645,92-5646,s. 92-5645 |
| Citation | 10 F.3d 168 |
| Parties | RICO Bus.Disp.Guide 8441 ARAB AFRICAN INTERNATIONAL BANK, Appellant, v. Jonathan I. EPSTEIN; Richard S. Goldman; Goldman & Epstein; Kendis & Baker, P.C.; Sherman L. Kendis. ARAB AFRICAN INTERNATIONAL BANK v. Jonathan I. EPSTEIN; Richard S. Goldman; Goldman & Epstein; Kendis & Baker, P.C.; Sherman L. Kendis. Jonathan I. Epstein, Richard S. Goldman and Goldman & Epstein, Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Merrill M. O'Brien (argued), Dollinger & Dollinger, Rochelle Park, NJ, for appellant in No. 93-5645.
Ana L. Day (argued), Voorhees & Acciavatti, Morristown, NJ, for appellants in No. 93-5646.
Before: SLOVITER, Chief Judge, and NYGAARD and WEIS, Circuit Judges.
In this legal malpractice action the district court granted summary judgment in favor of Jonathan I. Epstein, Richard S. Goldman, and the law firm of Goldman & Epstein (the "Epstein defendants"). Arab African International Bank appeals the summary judgment and the denial of its motion for leave to amend its complaint to assert a claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961 et seq. ("RICO"). The Epstein defendants appeal the denial of their motion for sanctions under Fed.R.Civ.P. 11. For the following reasons we will reverse the summary judgment, affirm the denial of sanctions and leave to amend, and remand the cause to the district court.
This case, now in its second appearance before us, arises out of Sencit F/G Development Company's default on a $3.25 million mortgage loan from Arab African. Arab African is an Egyptian bank with a place of business in New York. Sencit, a New Jersey partnership, was represented by the Epstein defendants in the loan transaction with Arab African. The property securing the loan is in New Jersey.
The loan documents originally provided that they would be executed in New Jersey and that New Jersey law would apply. Both designations were changed to New York, however, because the New Jersey Banking Act, N.J.Stat.Ann. Sec. 17:9A-315 et seq. (the "Act"), prohibits foreign banks from doing business in New Jersey. At Arab African's request, the Epstein defendants issued an opinion letter, signed by Epstein, stating that
the Mortgage and Note ... constitute binding, and enforceable agreements of the Partnership in accordance with their terms (subject as to enforcement of remedies to applicable bankruptcy, reorganization, insolvency, moratorium or other laws or equitable principles affecting the enforcement of creditor's rights, generally from time to time in effect).
After Sencit defaulted, Arab African commenced foreclosure proceedings in the Superior Court of New Jersey, Chancery Division. Sencit moved to dismiss the action, asserting that it was barred by section 330 of the Act, which provides:
A. A foreign bank shall not be entitled to maintain any action in any court of this State on any cause arising out of its transaction of business in this State in violation of the provisions of this article.
B. A foreign bank which violates any of the provisions of this article and its directors, officers, agents and employees who participate in any such violation shall be guilty of a misdemeanor.
N.J.Stat.Ann. Sec. 17:9A-330. After a two-day trial on the issue of where the transaction had occurred, the court ruled in Sencit's favor, holding that Arab African was a foreign bank that had done business in New Jersey in violation of the Act and therefore could not file its foreclosure actions in a New Jersey court. Arab African argued that, in light of the choice of law clause and the Epstein defendants' opinion letter, Sencit was estopped from raising the Act as a defense, but the court rejected this contention for two reasons: first, because Arab African had not relied on the opinion letter, and second, because estoppel does not apply to defenses based on penal statutes. Arab African did not raise the issue of the Act's constitutionality in the foreclosure action.
Arab African then sued in the United States District Court for the District of New Jersey, asserting claims of fraud, material misrepresentation and negligence against the Epstein defendants and against its own attorney and his law firm. 1 The Epstein defendants moved for summary judgment based in part upon the doctrine of issue preclusion. The district court found that the New Jersey Superior Court's determination that Arab African did not rely on the Epstein defendants' opinion letter precluded Arab African from relitigating the reliance issue, which was essential to its claims against them, and granted the motion. We reversed and remanded. Arab African Int'l Bank v. Epstein, 958 F.2d 532 (3d Cir.1992).
On remand, the Epstein defendants again moved for summary judgment, arguing that the Act precluded Arab African's suit. Arab African opposed the motion arguing that an application of the Act would violate the Commerce Clause. Relying on the Act and finding no constitutional violation, the district court granted the motion. Arab African moved for and was denied reconsideration and leave to file an amended complaint to assert a RICO claim. The Epstein defendants then moved for and were denied Rule 11 sanctions. This appeal followed.
The district court had jurisdiction under 28 U.S.C. Sec. 1332(a), and we have jurisdiction over the appeal under 28 U.S.C. Sec. 1291. Our review of the summary judgment is plenary, and we view the facts and all inferences in a manner most favorable to Arab African, the non-moving party. Arab African, 958 F.2d at 534. We review the district court's denials of leave to amend the complaint and Rule 11 sanctions for abuse of discretion. See Berger v. Edgewater Steel Co., 911 F.2d 911, 916 (3d Cir.1990), cert. denied, 499 U.S. 920, 111 S.Ct. 1310, 113 L.Ed.2d 244 (1991); Lony v. E.I. Du Pont De Nemours & Co., 935 F.2d 604, 615 (3d Cir.1991).
We reject the Epstein defendants' arguments that Arab African is estopped, either by claim preclusion or New Jersey's entire controversy doctrine, from arguing the Act's constitutionality. Claim preclusion, which prevents a party from litigating issues that might have been but were not raised in a prior action, Gregory v. Chehi, 843 F.2d 111, 116 (3d Cir.1988), attaches when there has been: "(1) a final judgment on the merits in a prior suit involving (2) the same parties or their privies and (3) a subsequent suit based on the same causes of action." United States v. Athlone Indus., Inc., 746 F.2d 977, 983 (3d Cir.1984); see Watkins v. Resorts Int'l Hotel & Casino, 124 N.J. 398, 412, 591 A.2d 592, 598 (1991). The foreclosure action and this action involve different defendants and different causes of action; accordingly, claim preclusion does not apply.
The entire controversy doctrine "embodies the principle that the adjudication of a legal controversy should occur in one litigation in only one court...." Cogdell v. Hospital Center at Orange, 116 N.J. 7, 560 A.2d 1169, 1172 (1989). It initially required litigants to assert all claims and defenses relating to the controversy between them in one action, but in 1989 was expanded to also require joinder in a single action of "all persons who have a material interest in the controversy." Cogdell, 560 A.2d at 1178. Although Arab African correctly points out that the 1989 requirement of joinder of parties does not govern the 1986 foreclosure action, see id. at 1179, this fact is irrelevant. The Epstein defendants do not argue that the doctrine required Arab African to bring the legal malpractice claims against them in the foreclosure action. Indeed, Arab African could not have done so, as it did not have a basis for these claims until after it lost in that action.
Rather, the Epstein defendants argue that, under the entire controversy doctrine, Arab African's failure to argue that the Act was unconstitutional in the foreclosure action in response to Sencit's assertion of it as a defense precludes them from making the argument here. We disagree. The entire controversy doctrine is an equitable one that seeks to "advance[ ] the goals of fairness, efficiency and finality." Watkins v. Resorts Int'l Hotel & Casino, 124 N.J. 398, 412, 591 A.2d 592, 598 (1991). Since Arab African's legal malpractice claims against the Epstein defendants properly constitute a second lawsuit, we see no unfairness or inefficiency in allowing Arab African to raise its constitutional argument here.
It is undisputed that under the Act, Arab African cannot avail itself of the New Jersey courts, or, correspondingly, of the federal courts in New Jersey sitting in diversity. See Woods v. Interstate Realty Co., 337 U.S. 535, 538, 69 S.Ct. 1235, 1237, 93 L.Ed. 1524 (1949). The issue on this appeal is whether such an application of the Act violates the Commerce Clause. 2 The district court, in granting summary judgment for the Epstein defendants, found that no constitutional problem was presented. We disagree.
The Constitution accords to Congress "the power to regulate commerce with foreign Nations, and among the Several States, and with the Indian Tribes." U.S. Const., art. I, Sec. 8, cl. 3. This clause not only constitutes an affirmative grant of power to Congress; it also "prevents the States from erecting barriers to the free flow of interstate commerce." American Trucking Ass'n v. Larson, 683 F.2d 787, 790 (3d Cir.1982). Thus, we have stated that
the commerce clause limits the power of a state to impose its choice of law on any transaction that is within the broad ambit of congressional power to regulate interstate commerce, and ...
(2) is one in which Congress has made no specific choice of law, but ...
(c) a non-discriminatory state choice of law, in an area where national uniformity may not be essential, imposes a burden on interstate commerce in excess of any value...
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