E. D. Systems Corp. v. Southwestern Bell Tel. Co.

• Decision Date: 30 April 1982
• Docket Number: No. 81-1144,81-1144
• Parties: E. D. SYSTEMS CORPORATION, Plaintiff-Appellant, v. SOUTHWESTERN BELL TELEPHONE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 453

674 F.2d 453

E. D. SYSTEMS CORPORATION, Plaintiff-Appellant, v. SOUTHWESTERN BELL TELEPHONE COMPANY, Defendant-Appellee.

No. 81-1144.

United States Court of Appeals Fifth Circuit.

April 30, 1982.

M. David Bryant, Jr., Dallas, Tex., for plaintiff-appellant.

James H. Hand, Martin C. Ruegsegger, Dallas, Tex., Liam S. Coonan, St. Louis, Mo., for defendant-appellee.

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

Before WISDOM, SAM D. JOHNSON and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

The appellant, E.D. Systems Corporation (EDS) sued Southwestern Bell Telephone Company (Bell) in state court in Texas to recover $200,000 representing the proceeds of two certificates of deposit, plus interest. EDS alleged that it had ownership rights in the certificates of deposit and that Bell's possession of the proceeds of the certificates amounted to conversion. Bell removed the case to federal court because of diversity of citizenship. Upon cross motions for summary judgment, the district court granted summary judgment for Bell and EDS brought this appeal. We reverse and remand for a full trial.

I. FACTS

The facts of this case, as they appear from the limited record before us, are complex. Both Bell and EDS claim the funds at issue because of dealings with a third party, Systems Financing, Inc. (SFI), which is not involved in this suit. In 1976, EDS sold computer equipment to SFI. SFI paid for the equipment with a note for $250,000, but then defaulted. EDS sued SFI in state court and won a judgment for $250,000 on June 2, 1978.

SFI's assets were under the control of a receiver in Texas state court. The receiver had been appointed in a divorce action between the president of SFI, Joel McQuade, and his wife, Elana. The receiver had the responsibility of settling claims against the community estate. On July 5, 1978, EDS intervened in the receivership to assert its claim against SFI. Among the funds that the receiver had listed as part of the community estate were two $100,000 certificates of deposit issued by the Mercantile National Bank in the name of SFI. EDS began to negotiate with the receiver and McQuade about settling EDS's claim in part with the certificates of deposit.

The certificates of deposit had a checkered history, not all of which had come to light when EDS began negotiating with McQuade and the receiver. Between 1974 and 1977, McQuade had been involved in a kickback scheme with a vice president of Acker's activities had drawn the attention of the United States Attorney for the Northern District of Texas as possible violations of the Racketeer Influenced and Corrupt Organizations Act, (RICO), 18 U.S.C. § 1962. By March of 1978, the United States Attorney became interested in subjecting the Mercantile certificates of deposit to forfeiture under § 1963 of RICO. ¹ The court appointed receiver of McQuade's community estate got wind of the United States Attorney's plans and obtained in his state court a temporary order restraining the United States from exercising dominion over the certificates. Before the temporary restraining order was served, however, the United States Attorney moved in federal district court to have the Mercantile certificates of deposit negotiated and the proceeds paid into the registry of the court. Judge Hughes granted the motion on March 8 in an order styled In Re: Grand Jury, Miscellaneous Docket No. 1012 (N.D.Tex. March 8, 1978).

Bell, Ray Allen Acker. McQuade had induced Bell to lease computer equipment from SFI by paying kickback money to Acker. At least part of the money paid to Acker was represented by the Mercantile certificates of deposit. To conceal the kickback scheme, the Mercantile certificates of deposit were issued in SFI's name but were held in escrow under an agreement giving Acker ownership of them.

One week later, on March 15, the United States removed the entire divorce action to federal court. The receiver moved to remand the divorce action to state court. On April 17, Judge Hughes granted the motion to remand the divorce action to state court "with the exception of any proceedings dealing with the Two Hundred Thousand Dollars ($200,000.00) which has been ordered paid into the registry of this court under the Miscellaneous Docket No. 1012...." The receiver then moved in Miscellaneous Docket 1012 for an order releasing the proceeds of the Mercantile certificates of deposit to it. On June 21, 1978, Judge Hughes denied this motion.

In July, 1978, EDS undertook to determine whether SFI and McQuade could give good title to the certificates even though the proceeds were in the federal court registry. EDS asked the United States Attorneys' Office about the United States' theory for holding the proceeds of the certificates, but the United States Attorneys' Office would not discuss the matter. EDS then concluded on the basis of its own legal EDS had considered satisfying its judgment against SFI with other SFI assets. Among these assets were SFI's interests in computer equipment leased to Bell. Because of the difficulty in valuing SFI's interest in the equipment leased by Bell, EDS wrote to Bell on August 4, 1978. EDS asked whether Bell was aware of adverse claims against the computer equipment. On August 11, Bell responded by referring the letter to its legal department and declaring that the matter was "complex."

research that the United States had no claim to the proceeds of the certificates of deposit. EDS also relied on McQuade's assurances that SFI could deliver clear title to the certificates.

EDS then moved rapidly ahead with its settlement negotiations. EDS reached a comprehensive agreement with the receiver and McQuade to release all of EDS's claims against McQuade and SFI in exchange for certain SFI assets including the proceeds of the certificates of deposit. The state court held a hearing on the settlement on September 11 and approved it on September 18. Three days later, SFI and McQuade assigned their interests in the certificates or their proceeds to EDS.

Bell then intervened in the receivership proceedings. On October 4, Bell moved to have a constructive trust in its favor impressed on the proceeds of certificates of deposit. Shortly thereafter, Bell informed EDS that Bell had various claims against SFI. On December 4, 1978, the state district court ruled against a constructive trust. The court also terminated the receivership. Bell made no effort to appeal the adverse ruling on its motion.

On March 1, 1979, Bell filed a motion with Judge Hughes to have the funds in Miscellaneous Docket No. 1012 released to it. Bell alleged that its vice president, Acker, had been indicted on November 14, 1978 for violations of RICO, 18 U.S.C. § 1962, and had pleaded guilty on December 7, 1978. Among the acts that Acker had acknowledged was receiving kickback money from McQuade. Bell claimed to be a victim of Acker's breach of his fiduciary duty and further claimed that any kickback money received by Acker was the property of Bell under the doctrine of constructive trust. The premise underlying Bell's claim to the kickback funds was that Bell had lost money because of the inflated costs of the computer leases that Acker had awarded in return for a bribe. The bribe money, therefore, should be paid to Bell to offset its losses. The United States supported Bell's motion, and on June 20, 1979, Judge Hughes ordered the proceeds of the certificates of deposit plus interest released to Bell. EDS was not a party to these proceedings.

EDS then brought the instant action against Bell in Texas state court. EDS alleged that it held title to the proceeds of the certificates of deposit and that Bell's possession of the proceeds was a conversion of EDS's property. Bell removed the suit to federal district court and successfully moved for summary judgment. EDS filed a timely notice of appeal.

EDS argues that the judgment below should be reversed on four separate grounds. First, EDS maintains that Bell's claim to the funds was adjudicated in the receivership proceedings in state court and, therefore, Bell is barred by res judicata. Second, EDS claims that it was a bona fide purchaser of the certificates of deposit, and, therefore, Bell's claim to the funds may not be asserted against it. Third, EDS contends that Bell's constructive-trust theory relies on rights obtained under an illegal agreement-the kickback scheme-and is barred by policy considerations under Texas law. Fourth and finally, EDS urges that there are disputed issues of material fact precluding summary judgment. EDS particularly argues that there are disputed factual issues in its claim that Bell is barred by laches or estoppel from asserting a constructive trust in the funds. We address these issues in order.

II. Res Judicata

EDS argues that Bell is precluded from asserting a constructive trust over the certificates of deposit or their proceeds because A federal court asked to give res judicata effect to a state court judgment must apply the res judicata principles of the law of the state whose decision is set up as a bar to further litigation. 28 U.S.C. § 1738; Rollins v. Dwyer, 666 F.2d 141, 144 (5th Cir. 1982). We look, therefore, to Texas law to decide whether the prior Texas decision is res judicata.

the rights have been finally adjudicated in favor of EDS. EDS contends that Bell's defeat in the state court receivership proceedings forecloses Bell from renewing its claim in federal court. Bell replies that the state court adjudication does not bind it under any one of three theories: (1) the state court's rejection of Bell's claim was not a final judgment, (2) the state court's approval of the receiver's actions did not explicitly reject Bell's constructive trust claim, or (3) the state court lacked jurisdiction to determine ownership of the funds. Because we find the jurisdictional issue dispositive, we do not address Bell's other...