Gargallo v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
| Decision Date | 09 November 1990 |
| Docket Number | No. 88-3478,88-3478 |
| Citation | 918 F.2d 658 |
| Parties | Fed. Sec. L. Rep. P 95,642 Miguel A. GARGALLO, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; and Larry W. Tyree, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Miguel A. Gargallo, Columbus, Ohio, for plaintiff-appellant.
John F. Winkler, Baker & Hostetler, Columbus, Ohio, for defendants-appellees.
Before: MERRITT, Chief Judge; RYAN, Circuit Judge; and BROWN, Senior Circuit Judge.
This case presents the interesting dual questions 1) whether a federal court must apply federal or state claim preclusion law in deciding 2) whether a prior state court judgment upon subject matter over which only a federal court has jurisdiction is a bar to a subsequent federal court claim upon the identical cause of action. Plaintiff Miguel A. Gargallo sued defendants Merrill Lynch, Pierce, Fenner, & Smith, Inc. ("Merrill Lynch") and Larry W. Tyree, a security salesman for Merrill Lynch, in the United States District Court for the Southern District of Ohio alleging violations of the Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq., and Securities Exchange Commission rules and regulations. Finding that plaintiff had previously brought the same claim against Merrill Lynch in a state court and that the state court had dismissed the claim on its merits, the district court dismissed the suit below on the grounds of res judicata as to Merrill Lynch, and collateral estoppel as to Larry Tyree. The plaintiff appeals, and we reverse holding 1) that state claim preclusion law must be applied, and 2) that, in this instance, the prior state adjudication is not a bar to subsequent federal court action upon the same cause of action.
Miguel Gargallo opened a "margin brokerage account" with Merrill Lynch in 1976. He maintained the account until 1980, when his investments apparently went awry and losses occurred, resulting in a debt of some $17,000 owed to Merrill Lynch on margin calls. When the obligation was not paid, the brokerage firm filed suit for collection in the Court of Common Pleas, Franklin County, Ohio. In response, Mr. Gargallo filed an answer and counterclaim against Merrill Lynch, alleging that Merrill Lynch caused his losses through "negligence, misrepresentations, and churning," and that the firm had violated 15 U.S.C. Secs. 78g(c), 78i, and 78j of the federal securities laws. After a considerable history of discovery difficulties, the state court dismissed Mr. Gargallo's counterclaim "with prejudice," citing Ohio Civil Rule 37, for refusal to comply with Merrill Lynch's discovery requests and the court's discovery orders.
Mr. Gargallo appealed the dismissal, without success, to the Ohio Court of Appeals. He then filed a complaint in the United States District Court, Southern District of Ohio, charging Merrill Lynch and its account executive, Larry Tyree, who was not a party to the state court action, with violating the margin rules of 15 U.S.C. Sec. 78g(c) and Regulation T and engaging in deceptive investment practices proscribed by 15 U.S.C. Secs. 78i, 78j, 78j(b). These claims were based on the same transactions at issue in the state litigation. After preparing a thoughtful written opinion, the district court dismissed the suit against Merrill Lynch on res judicata grounds, finding that the "issues, facts and evidence to sustain this action are identical to the claims asserted [against the brokerage firm] in [Mr. Gargallo's] counterclaim that was dismissed with prejudice by the state court." Since it was undisputed that defendant Larry W. Tyree, was in privity with Merrill Lynch as its employee, the court also dismissed the plaintiff's claim against Tyree, but did so finding that "Tyree has established the elements ... of collateral estoppel." This appeal followed.
There is no dispute in this case about the essential facts relating to the summary judgment, and the ultimate issue is: whether the district court correctly dismissed the plaintiff's claims on res judicata and collateral estoppel grounds. We review that question de novo to determine whether Merrill Lynch and Larry Tyree are entitled to judgments "as a matter of law." Fed.R.Civ.P. 56(c). See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986); Burkart v. Post-Browning, Inc., 859 F.2d 1245, 1249 (6th Cir.1988).
Since there has been some confusion in this case about the meaning of the terms res judicata and collateral estoppel, perhaps a preliminary word of clarification would be useful.
Res judicata and collateral estoppel are not the same. Res judicata, or claim preclusion as it is more helpfully termed, is the doctrine, simply stated, by which a final judgment on the merits in an action precludes a party from bringing a subsequent lawsuit on the same claim or cause of action or raising a new defense to defeat a prior judgment. See generally J. Friedenthal, M. Kane & A. Miller, Civil Procedure at 607-09 (1985). It precludes not only relitigating a claim or cause of action previously adjudicated, it also precludes litigating a claim or defense that should have been raised, but was not, in a claim or cause of action previously adjudicated. This last variation was formerly known as the rule against splitting a cause of action. Id. at 607.
Collateral estoppel, or issue preclusion as it is better termed, precludes relitigation of issues of fact or law actually litigated and decided in a prior action between the same parties and necessary to the judgment, even if decided as part of a different claim or cause of action. Id. As will be seen hereafter, we are concerned in this case with the question of the applicability of claim preclusion in its simplest form: the preclusive effect of a prior judgment upon the identical cause of action brought by the same party in subsequent litigation.
The federal securities law violations asserted against Merrill Lynch and Larry Tyree in this litigation are the same, for all practical purposes, as those Mr. Gargallo previously asserted in the counterclaim he filed in the Franklin County court. For reasons we shall discuss shortly, Ohio claim preclusion law ultimately determines the outcome of this case. Consequently, we must decide whether the Franklin County court judgment dismissing Mr. Gargallo's first lawsuit would operate as a bar, under Ohio claim preclusion rules, to the action brought in the district court, now under review, had it been brought in an Ohio court. Had Mr. Gargallo's latest claim of fraud and negligence against his broker been brought in an Ohio court, assuming no problem with the state court's subject matter jurisdiction over the federal claims, we have no doubt that the doctrine of claim preclusion would require the district court to dismiss the newly filed claims.
In Ohio, the requirements for application of the doctrine of claim preclusion, or res judicata as the earlier Ohio court termed it, are the same as those applicable in a federal court:
"The doctrine of res judicata is that an existing final judgment rendered upon the merits, without fraud or collusion, by a court of competent jurisdiction, is conclusive of rights, questions and facts in issue, as to the parties and their privies, in all other actions in the same or any other judicial tribunal of concurrent jurisdiction."
Norwood v. McDonald, 142 Ohio St. 299, 305, 52 N.E.2d 67, 71 (1943) (). Accord Krahn v. Kinney, 43 Ohio St.3d 103, 107, 538 N.E.2d 1058, 1062 (1989). And, "a judgment in a former action does not bar a subsequent action where the cause of action prosecuted is not the same." Norwood, 142 Ohio St. at 305, 52 N.E.2d at 71 (citations omitted). Accord Krahn, 43 Ohio St.3d at 107, 538 N.E.2d at 1062.
Under Ohio law, the dismissal with prejudice of Mr. Gargallo's Common Pleas Court counterclaim for noncompliance with Ohio's Civil Rule 37 was a "final judgment rendered upon the merits." See Austin v. Miami Valley Hosp., 19 Ohio App.3d 231, 483 N.E.2d 1185 (Ohio Ct.App.1984). 1
To determine whether a final judgment upon one claim precludes the filing of another claim in Ohio depends on whether the second claim embodies the same cause of action as the first:
This determination must be made from an examination of the essential operative facts stated as constituting plaintiff's cause of action and the legal implications arising therefrom in each proceeding.
Norwood, 142 Ohio St. at 310, 52 N.E.2d at 73.
Mr. Gargallo's state court counterclaim alleged that Merrill Lynch had engaged in deceptive practices in the management of Mr. Gargallo's accounts, including "negligence, misrepresentation, and churning," in violation of federal securities laws, specifically 15 U.S.C. Secs. 78g(c), 78i and 78j, and state common law. Mr. Gargallo's suit against the defendants in the district court complained of the same transactions, alleged violation of the same federal securities law, and added alleged violations of certain Securities and Exchange Commission regulations. We agree with the district court that the "issues, facts, and evidence to sustain this action are identical to the claims asserted ... in [plaintiff's state] counterclaim," and we are satisfied that the federal claim or cause of action giving rise to this appeal is the same claim or cause of action that was asserted in the counterclaim dismissed in the state court litigation.
Thus, we have no question that, absent any regard for subject matter jurisdiction, Ohio claim preclusion law would bar the claim asserted in Mr. Gargallo's district court complaint had it been filed in an Ohio court.
However, the district court in which plaintiff brought his claim is not an Ohio court but a federal tribunal. Consequently,...
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