Gonzalez v. Banco Cent. Corp.

• Decision Date: 08 March 1994
• Docket Number: No. 93-2021,93-2021
• Citation: 27 F.3d 751
• Parties: Fed. Sec. L. Rep. P 98,307, RICO Bus.Disp.Guide 8590 Olga GONZALEZ, a/k/a Olga Gonzalez Abreu, et al., Plaintiffs, Appellants, v. BANCO CENTRAL CORP., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 751

27 F.3d 751

Fed. Sec. L. Rep. P 98,307, RICO Bus.Disp.Guide 8590

Olga GONZALEZ, a/k/a Olga Gonzalez Abreu, et al., Plaintiffs, Appellants, v. BANCO CENTRAL CORP., et al., Defendants, Appellees.

No. 93-2021.

United States Court of Appeals, First Circuit.

Heard March 8, 1994.

Decided June 30, 1994.

Fernando L. Gallardo, with whom Woods & Woods was on brief, for appellants.

Luis Sanchez Betances, with whom Ivonne Cruz Serrano, Luis A. Melendez-Albizu, and Sanchez-Betances & Sifre were on brief, for appellees.

Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

SELYA, Circuit Judge.

This appeal raises tantalizing questions concerning the application of the doctrine of res judicata to nonparties. Because we conclude that appellants cannot lawfully be precluded from bringing their action in the circumstances at bar, we reverse the district court's order of dismissal and remand for further proceedings.

I. BACKGROUND

In the 1970s, a consortium of real estate developers sold subdivided lots of undeveloped land to approximately 3,000 purchasers, most of whom resided in Puerto Rico. Contrary to the promoters' glowing representations, the real estate proved to be Florida swampland, unsuitable for development.

In 1982, a gaggle of duped purchasers (whom we shall call "the Rodriguez plaintiffs") commenced a civil action in the United States District Court for the District of Puerto Rico. They sued the sellers, the banks that financed the project, ¹ and several related individuals. The Rodriguez plaintiffs alleged violations of the Interstate Land Sales Full Disclosure Act ("ILSFDA"), 15 U.S.C. Sec. 1703, the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j, Rule 10b-5 thereunder, 17 C.F.R. Sec. 240.10b-5, and the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-1964. Some of the plaintiffs then assisted in the formation of the Sunrise Litigation Group. The group's members paid fees that helped defray the costs of the litigation and exchanged information that sometimes proved to be of use in pursuing the litigation.

After several years of discovery and numerous amendments to the pleadings, the Rodriguez plaintiffs, 152 strong, sought to convert their suit to a class action. In April of 1987, the district court refused either to certify a class or to permit additional plaintiffs to intervene. Almost immediately thereafter, several prospective plaintiffs who had tried in vain to join the Rodriguez litigation initiated the instant action. The new coalition of claimants (whom we shall call "the Gonzalez plaintiffs") were represented by the same lawyers who represented the Rodriguez plaintiffs. They sued the same defendants and their complaint mimicked a proposed amended complaint on file (but never allowed) in the Rodriguez litigation.

During the next few years, some of the Gonzalez plaintiffs joined the Sunrise Litigation Group. In the same time frame, they prevailed on no fewer than five motions to bring in additional claimants. And on January 16, 1992, the district court allowed the Gonzalez plaintiffs to amend their complaint to include mail fraud as a RICO predicate act, see 18 U.S.C. Sec. 1962(d), and to include claims for breach of contract and fraud under Puerto Rico law, see, e.g., P.R.Laws Ann. tit. 31, Sec. 3018.

Despite strong evidence of skullduggery, ² the Rodriguez plaintiffs frittered away much of their case through a series of pretrial blunders. See, e.g., Rodriguez v. Banco Central Corp., 727 F.Supp. 759, 763-65 (D.P.R.1989) (dismissing claims under ILSFDA as time-barred), aff'd in part and vacated in part, 917 F.2d 664 (1st Cir.1990); id. at 769-70 (dismissing RICO claims premised on federal securities violations); Rodriguez v. Banco Central Corp., 777 F.Supp. 1043, 1047 (D.P.R.1991) (discussing plaintiffs' failure to plead certain potentially viable claims). The Rodriguez plaintiffs ultimately lost what remained of their case after a seven-week jury trial when Judge Fuste directed verdicts for the defendants on the only surviving claims and this court upheld his ruling on appeal, see Rodriguez v. Banco Central Corp., 990 F.2d 7, 14 (1st Cir.1993).

Following the interment of the Rodriguez litigation, renewed attention focused on the Gonzalez litigation (which was pending before Judge Laffitte). By then, the Gonzalez plaintiffs were pressing certain claims that replicated those pressed and lost by the Rodriguez plaintiffs, e.g., claims under the ILSFDA, Rule 10b-5, and RICO (premised on securities fraud), and certain additional claims that had been neglected or abandoned by the Rodriguez plaintiffs, e.g., RICO claims premised on mail fraud, state-law claims for fraud, and claims for breach of contract.

After silhouetting the Gonzalez plaintiffs' suit against the backdrop of the completed Rodriguez litigation, Judge Laffitte, by way of an unpublished memorandum opinion, dismissed the action in its entirety on grounds of res judicata. The Gonzalez plaintiffs appeal. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

II. ANALYSIS

Although appellants were not parties to the earlier litigation, the court below applied res judicata in bar of their claims under a theory of privity. The applicability vel non of the doctrine of res judicata presents a question of law over which we exercise plenary appellate review. See E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1287 (9th Cir.1992). Federal law governs the res judicata effects of a federal court judgment in a federal question case as applied to a later case that again presents a federal question to a federal court. See Blonder-Tongue Labs., Inc. v. University of Ill. Found., 402 U.S. 313, 324 n. 12, 91 S.Ct. 1434, 1440 n. 12, 28 L.Ed.2d 788 (1971); Kale v. Combined Ins. Co., 924 F.2d 1161, 1165 (1st Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 69, 116 L.Ed.2d 44 (1991); see also 18 Charles A. Wright, et al., Federal Practice and Procedure Sec. 4466, at 617-18 (1981) (hereinafter "Wright & Miller"). Thus, because both the earlier (ostensibly precluding) suit and the later (ostensibly precluded) suit invoked federal question jurisdiction, see 28 U.S.C. Sec. 1331, the rule of decision here is supplied by federal law.

The accepted formulation of res judicata for federal court use teaches that "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980). Accordingly, the elements of res judicata are (1) a final judgment on the merits in an earlier suit, (2) sufficient identicality between the causes of action asserted in the earlier and later suits, and (3) sufficient identicality between the parties in the two suits. See Aunyx Corp. v. Canon U.S.A., Inc., 978 F.2d 3, 6 (1st Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1416, 122 L.Ed.2d 786 (1993); Kale, 924 F.2d at 1165.

In the present situation, the first element in this tripartite test provokes no controversy; appellants concede that the earlier (Rodriguez) suit resulted in final judgment on the merits. Thus, we concentrate our energies on the remaining two prongs of the test.

A. Identicality of Causes of Action.

To determine whether sufficient subject matter identity exists between an earlier and a later suit, federal courts employ a transactional approach. See Kale, 924 F.2d at 1166; Manego v. Orleans Bd. of Trade, 773 F.2d 1, 5 (1st Cir.1985), cert. denied, 475 U.S. 1084, 106 S.Ct. 1466, 89 L.Ed.2d 722 (1986); see also Restatement (Second) of Judgments Sec. 24 (1992). This approach recognizes that a valid and final judgment in an action will extinguish subsequent claims "with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose." Manego, 773 F.2d at 5 (quoting Restatement Sec. 24).

To understand the transactional approach, it is necessary to appreciate that a single transaction or series of transactions can--and often does--give rise to a multiplicity of claims. Phrased another way, "[a] single cause of action can manifest itself in an outpouring of different claims, based variously on federal statutes, state statutes, and the common law." Kale, 924 F.2d at 1166. The necessary identity will be found to exist if both sets of claims--those asserted in the earlier action and those asserted in the subsequent action--derive from a common nucleus of operative facts. See id. This principle pertains no matter how diverse or prolific the claims themselves may be. See 1B J Moore, Federal Practice p 0.410 at 350 (2d ed. 1993) (explaining that "the 'cause of action' or 'claim' ... is bounded by the injury for which relief is demanded, and not by the legal theory"). It follows that the omission of a particular statement of claim from the original suit is of no great consequence; if the transaction is the same and the other components of the test are satisfied, principles of res judicata will bar all claims that either were or could have been asserted in the initial action. See Kale, 924 F.2d at 1166; Manego, 773 F.2d at 5. The key is to define the underlying injury.

This definitional process is not a purely mechanical exercise. "What factual grouping constitutes a 'transaction', and what groupings constitute a 'series', are [matters that should] be determined pragmatically," taking into consideration a wide variety of relevant factors, including but not limited to such things as "whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations...." Aunyx, 978 F.2d at 7 (quoting Restatement (Second) of Judgments Sec. 24).

Given these criteria, we believe that there is sufficient identicality here between the earlier and later actions to satisfy...