In re National Auto Credit, Inc., C.A. No. 19028-NC; Consolidated (DE 8/3/2004)

• Decision Date: 03 August 2004
• Docket Number: C.A. No. 19028-NC; Consolidated.
• Parties: In re National Auto Credit, Inc. — Shareholders Litigation
• Court: Supreme Court of Delaware

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In re National Auto Credit, Inc. — Shareholders Litigation

C.A. No. 19028-NC; Consolidated.

Court of Chancery of Delaware.

Submitted: April 20, 2004.

August 3, 2004.

Norman M. Monhait, Esquire, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, DE.

John L. Reed, Esquire, Duane Morris LLP, Wilmington, DE.

Julie T. Saunders, Esquire, Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, DE.

Judith M. Kinney, Esquire, Reed Smith LLP, Wilmington, DE.

JOHN W. NOBLE, Vice Chancellor.

Dear Counsel:

The Defendants have moved to dismiss this derivative action (the "Delaware Action") because of a settlement reached in a proceeding in New York brought by a different plaintiff but asserting substantially the same claims against the same defendants.¹ That sounds like a fairly routine application, one requiring the Court to give effect to the settlement in New York through the full faith and credit clause of the United States Constitution.² The difference, in this instance, is that the settlement in New York will not go into effect until the dismissal of the Delaware Action. The question, thus, is whether the order approving the settlement in New York constitutes a final order for purposes of application of the principles of claim preclusion through the full faith and credit clause.³

I.

Robert Zadra ("Zadra") brought an action, both derivatively and as a putative class representative, in the Supreme Court of the State of New York (the "New York Action")⁴ seeking remedies for the same wrongs alleged in the Delaware Action's governing complaint.⁵ The defendants in the New York Action, also Defendants in this action, and Zadra negotiated a settlement (the "Amended Stipulation of Settlement"). By Order and Judgment, filed January 8, 2004 (the "New York Order"), the Amended Stipulation of Settlement was approved.⁶ The Lead Plaintiff in the Delaware Action and others objected to the proposed settlement; those objections were rejected.⁷

In order to ascertain the effect of the New York Order on this action, it is first necessary to set forth its pertinent terms. In addition to approving the Amended Stipulation of Settlement as "fair and reasonable and in the best interests of NAC, its shareholders and the members of the Class," the New York Order provides in part:

2. In light of the pending consolidated derivative action filed in the Court of Chancery for the State of Delaware, entitled "In re National Auto Credit, Inc. Shareholders Litigation," C.A. No. 19028 NC ("the Consolidated Derivative Action"), and the requirement of the Amended Stipulation of Settlement that such Consolidated Derivative Action be dismissed with prejudice before the entry of the Final Order and Judgment in this Action, the parties hereto are hereby directed to take all reasonable steps necessary to procure the immediate dismissal with prejudice of the Consolidated Derivative Action.

3. Pending receipt by the Court of notification that there has been entered a final, nonappealable order dismissing with prejudice the Consolidated Derivative Action, all discovery and other pretrial proceedings in the Action are stayed . . .

4. Upon notification to the Court that there has been entered a final, non-appealable order and judgment by the Delaware Chancery Court and any applicable court of appellate jurisdiction in Delaware dismissing with prejudice the Consolidated Derivative Action, this Court will issue its Final Order and Judgement, which will order the parties to forthwith perform the provisions of the Amended Stipulation Settlement as follows:

a. Ordering Defendants . . . , to make the payments from the Settlement Fund ... and to otherwise effectuate the remaining terms of the Settlement ...

b. Ordering the Amended Derivative and Class Action Complaint in this Action be dismissed with prejudice. . . .

c. Ordering that the named plaintiff in this Action, NAC, all members of the Class previously certified by this Court and all other shareholders of NAC [which would include the Delaware Plaintiffs] are barred and permanently enjoined from prosecuting against the Settling Defendants . . . any class, representative, derivative, or individual claim, known or unknown, which has been or could have been asserted in the Action, the Consolidated Derivative Action, or in any other court or forum in connection with, arising out of or in any way related to any acts, facts, transactions, occurrences, representations or omissions set forth, alleged, embraced or otherwise referred to in the Amended Derivative and Class Action Complaint in this Action, the Consolidated Derivative Action, and the Amended Stipulation of Settlement. . . .

. . . .

6. This Court shall retain exclusive jurisdiction over the action and the parties to the Amended Stipulation of Settlement to enter any further orders as may be necessary to enforce the Amended Stipulation of Settlement, the settlement provided for therein and the provisions of this Conditional Final Order and Judgment.

II.

In accordance with 28 U.S.C. § 1738, "all courts [must] treat a state court judgment with the same respect that it would receive in the courts of the rendering state."⁸ Thus, the New York law of res judicata governs whether the New York Order must be given claim preclusion effect in this action.⁹ In New York, it is an "established rule that a dismissal on the merits of one derivative action is generally a bar to suits by other stockholders of the same corporation on the same cause of action."¹⁰ In order for a judgment to be accorded res judicata effect under the law of New York, it must be "final."¹¹ Unfortunately, the concept of finality varies with the context, and no one simple formulation can capture its full essence.

Whether a judgment, not "final" in the sense of 28 U.S.C. § 1291, ought nevertheless be considered "final" in the sense of precluding further litigation of the same issue, turns upon such factors as the nature of the decision (i.e., that it was not avowedly tentative), the adequacy of the hearing, and the opportunity for review. "Finality" in the context here relevant may mean little more than that the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again.¹²

III.

The starting point for any analysis of a court's order, of course, is with the language of the order.¹³ The Defendants properly counsel the Court not to isolate its consideration of the New York Order to certain words but to view the order comprehensively and in the context in which it was issued — after a contested settlement proceeding. Paragraph 2 of the New York Order recites that the Delaware Action must "be dismissed with prejudice before entry of the Final Order and Judgment in [the New York Action]." Similarly, by Paragraph 4 of the New York Order, after the Delaware Action has been dismissed without the possibility of any appeal, the "Final Order and Judgment" will be entered in the New York Action, and, then, and only then, will the benefit of the settlement be distributed. Finally, in Paragraph 6, the New York Order is referred to as the "Conditional Final Order and Judgment." The use of the word "conditional" and the recognition that another order will be necessary suggests a degree of tentativeness. Conversely, a "final" order for res judicata purposes need not be the "last" order to be entered in the case.

As a substantive matter, the New York Order's disposition of the claims is expressly conditioned upon this Court's first dismissing the Delaware Action. The dismissal, however, of the Delaware Action is not a mere ministerial act.¹⁴ The decision to give res judicata (or collateral estoppel) effect to the judgment of another court may require inquiry into many issues: for example, whether the judgment was final and valid; whether there was a full and fair opportunity to be heard; whether the issues were the same.¹⁵ The New York Order can, by its terms, be of no dispositive effect until another court (and the appellate jurisdiction reviewing it as well) has terminated the other litigation. Thus, the dispositive nature of the New York Order has no viability until the Delaware judicial system has acted. Accordingly, by its terms — the mechanism which gives substance to the New York Order — the New York Order is conditional; it is conditioned on an inquiry by another court that is far more than an administrative or ministerial act. As such, the New York Order is "avowedly tentative" as to dismissal of the derivative claims.

The Defendants' sponsorship of the New York Order suffers from yet another fundamental misunderstanding of the nature of res judicata. The Defendants — openly and candidly — are seeking to have the claim preclusive effect of the New York Order determined in advance of entry of a judgment that would obligate them to make any settlement distribution.¹⁶ The Defendants, however, are not entitled to have the claim preclusive effect of the New York Order resolved in the New York Action. "It is well settled that the court adjudicating a dispute cannot predetermine the res judicata effect of its own judgment."¹⁷ The Defendants now seek for the process to be reversed.¹⁸ That the determination of the res judicata effect is sought before they become obligated under the terms of the New York Order is just further evidence that the New York Order is neither final nor entitled to res judicata effect.

The Defendants properly emphasize that finality is neither a precise nor a rigid concept. Yet, they focus on the concept of finality as it has developed in the context of issue preclusion.¹⁹ In that context, for example, a specific factual issue has been resolved or the question of liability has been answered.²⁰ The proposed settlement of the derivative claims at issue in the New York Action was found to be fair and reasonable. If that were the issue before this Court, then, as a matter of issue...