Lane v. Sullivan, 89-2037

• Decision Date: 10 April 1990
• Docket Number: No. 89-2037,89-2037
• Citation: 900 F.2d 1247
• Parties: Clift C. LANE, Individually, and as Trustee under the Clift C. Lane Revocable Trust, and Dorothy P. Lane, Individually, and as Trustee under the Dorothy P. Lane Revocable Trust, et al., Appellants, v. William B. SULLIVAN, Individually, and as a Partner of the Law Partnership of Arent, Fox, Kintner, Plotkin & Kahn, et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1247

900 F.2d 1247

Clift C. LANE, Individually, and as Trustee under the Clift

C. Lane Revocable Trust, and Dorothy P. Lane,

Individually, and as Trustee under the

Dorothy P. Lane Revocable

Trust, et al., Appellants, v. William B. SULLIVAN, Individually, and as a Partner of the

Law Partnership of Arent, Fox, Kintner, Plotkin &

Kahn, et al., Appellees.

No. 89-2037.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 18, 1990.

Decided April 10, 1990.

Timothy Dudley, Little Rock, Ark., for appellants.

Ronald A. May, Little Rock, Ark., for appellees.

Before LAY, Chief Judge, FLOYD R. GIBSON, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

This case is one of several involving claims by Appellants Dorothy and Clift Lane (the "Lanes") against various parties for alleged wrongdoing in the bankruptcy and sale of their poultry companies. Here the Lanes are suing their lawyer, William Sullivan, and his law firm, Arent, Fox of Washington, D.C. (collectively "Sullivan") for legal malpractice.

The Lanes appeal the grant of summary judgment to Sullivan entered by the district court ¹ on the basis of collateral estoppel. The Lanes argue that the easier burden of proof (preponderance) to which they were subject in this suit forecloses the possibility of the preclusive effect of the prior judgment against them where they were subject to a higher burden of proof (clear and convincing). We disagree and affirm the district court on the basis of particular specific findings made in the earlier suit.

I. BACKGROUND

Although we must review the facts in this case in the light most favorable to the Lanes because the case has come to us after a grant of summary judgment, the facts are already well laid out in several opinions, and we will not again recite them. ² The short of the Lanes' trials for purposes of this case is as follows. After creating a successful poultry business over the course of several decades, things went sour and the Lanes filed for bankruptcy in 1982. They were represented in the bankruptcies by Sullivan. A Special Panel was appointed during the bankruptcy to run their companies in the event of certain defaults. The Special Panel stepped in sooner than called for by the terms of the bankruptcy plan on the condition that the Lanes sign over all their interest in stock of the Lane companies to the panel--in return the Lanes were to receive consulting fees. The Lanes signed over their interests, and the Special Panel began running the poultry businesses. An opportunity to sell the companies to a larger poultry concern presented itself, and the Special Panel did just that. As part of their complaints in both this and the earlier case, the Lanes allege that the Special Panel and Sullivan colluded to facilitate the sale of the Lane Companies before the Lanes actually transferred their holdings to the Special Panel.

The Lanes also complain that they did not understand the nature of the documents they signed when they transferred their stock to the Special Panel and were, in essence, cheated out of the profits from the sale of their companies. They sued the Special Panel members in federal district court in 1986 for breach of fiduciary duties under Arkansas law and requested the court to impose a constructive trust. The facts alleged in that complaint centered around the early transfer of control of the Lane Companies to the Special Panel, the transfer from the Lanes to the panel of the stock interests, and the sale of the companies. The district court ³ denied any relief, and a panel of this court affirmed in Lane v. Peterson, 851 F.2d 193 (8th Cir.1988) (hereinafter "Lane I ").

In this suit, the Lanes charged Sullivan and his law firm with legal malpractice based on the same facts alleged in their suit against the Special Panel. Because the facts were the same as in the earlier case, Sullivan filed a motion to deem facts admitted. The district court treated this as a motion for summary judgment on the basis of collateral estoppel.

Judge Arnold found that Judge Harris' specific finding made in the first case, that the Lanes understood the transfer documents, was a finding necessary to that judgment and one that the Lanes had already had a chance to fully and fairly litigate. Thus, Judge Arnold held that the Lanes were precluded from relitigating that issue. He rejected the Lanes' suggestion that preclusion could not obtain because of the different burdens of proof between Lane I and this case because the specific finding on the Lanes' understanding of the transfer documents was not affected by that changed burden. Judge Arnold concluded that the findings reached by Judge Harris in the first case were conclusively reached on the question of the Lanes' understanding. Consequently, Judge Arnold granted summary judgment to Sullivan and dismissed the Lanes' complaint with prejudice.

II. DISCUSSION

The precise issue on this appeal is whether the findings made by Judge Harris in Lane I with respect to the Lanes' understanding of the transfer of their stock holdings to the Special Panel preclude a finding that Sullivan committed malpractice in his representation of the Lanes, despite the lesser burden of proof in this case. Put more simply, the issue is whether the Lanes are collaterally estopped from pursuing their malpractice claim by the findings from Lane I.

The threshold question for us, which was not addressed by the parties or the district court, is one of choice of law. Does federal or Arkansas law control the application of collateral estoppel in this case? The judgment from Judge Harris which is sought to be given preclusive effect was made by a federal district court sitting in diversity on claims under Arkansas law. Likewise, the district court below had jurisdiction of claims under Arkansas law by reason of diversity. Thus, should collateral estoppel apply, one federal court would be giving preclusive effect to the judgment of another federal court. That scenario seems to compel the conclusion that federal law should control. Hauser v. Krupp Steel Producers, Inc., 761 F.2d 204, 207 (5th Cir.1985) ("federal law governs the collateral estoppel effect of an earlier federal judgment, even in diversity cases.") (citation omitted).

However, cases from our court have consistently concluded that collateral estoppel in a diversity action is a question of substantive law controlled by state common law. In some of those cases the first judgment was from a state court or agency. Richardson v. Phillips Petroleum Co., 791 F.2d 641 (8th Cir.1986) (prior judgment was proceeding before Arkansas Oil and Gas Commission and was not given preclusive effect), cert. denied, 479 U.S. 1055, 107 S.Ct. 929, 93 L.Ed.2d 981 (1987); Saporta v. Stephenson, 751 F.2d 312 (8th Cir.1985) (per curiam) (Nebraska state court judgment on doctor's negligence given preclusive effect); Kuehn v. Garcia, 608 F.2d 1143 (8th Cir.1979) (North Dakota Supreme Court disciplinary proceeding against attorney not given preclusive effect due to lack of mutuality required by recent North Dakota precedent), cert. denied, 445 U.S. 943, 100 S.Ct. 1340, 63 L.Ed.2d 777 (1980). Nevertheless, we do not believe that we can depart from this conclusion in this case simply because the first judgment here came from a diversity case in federal court rather than from a true Arkansas state court. Just as the law of Arkansas governs in its state courts, it governed in the cases before Judges Harris and Arnold sitting in diversity, and so it governs us in the application of collateral estoppel in this case. See Iowa Electric Light and Power Company v. Mobile Aerial Towers, 723 F.2d 50, 52 (8th Cir.1983) (affirming use of collateral estoppel based on diversity judgment and declaring state common law controlling without discussion).

Having determined that Arkansas law applies does not, unfortunately, get us much farther into our inquiry. There is a dearth of Arkansas case law on the use of collateral estoppel, and none whatsoever on the question of its use when burdens change from one suit to the next, as in this case. Arkansas law does characterize the elements of collateral estoppel in familiar language:

1) the issue sought to be precluded must be the same as that involved in the prior litigation; 2) that issue must have been actually litigated; 3) it must have been determined by a valid and final judgment; and 4) the determination must have been essential to the judgment.

East Texas Motor Freight Line v. Freeman, 289 Ark. 539, 543, 713 S.W.2d 456, 459 (1986) (citations omitted).

But that is little more than hornbook law, and it does not help answer the question of what the Arkansas courts would do with differing burdens of proof.

When faced with deciding what state law is without the benefit of precedent to guide us, "we [will] apply what we view as the optimal rule of collateral estoppel under the circumstances of th[e] case." Gerrard v. Larsen, 517 F.2d 1127, 1132 (8th Cir.1975). We have done this before with respect to the Arkansas law of collateral estoppel. In Davidson v. Lonoke Production Credit Assoc., 695 F.2d 1115 (8th Cir.1982), we concluded that, despite the general rule of mutuality of estoppel applied in Arkansas law, mutuality would not be required by the Arkansas courts in all cases. ⁴

The Arkansas law of collateral estoppel outlined above clearly applies in this case. The issue in both the prior litigation before Judge Harris and in this case before Judge Arnold was whether or not the Lanes understood what they were doing when they transferred their stock holdings to the Special Panel. A finding that they did understand defeats both the first cause of action, based on fiduciary duty, and this one, based on legal malpractice. ⁵ The identity of issues is present. Whether the issue of understanding was actually litigated, determined in a final and valid judgment, and essential to...