Maldonado v. Flynn

• Decision Date: 29 May 1980
• Citation: 417 A.2d 378
• Parties: William MALDONADO, Plaintiff, v. William H. FLYNN et al., Defendants.
• Court: Court of Chancery of Delaware

Page 378

417 A.2d 378

William MALDONADO, Plaintiff, v.William H. FLYNN et al., Defendants.

Court of Chancery of Delaware, New Castle County.

Submitted Feb. 27, 1980.

Decided May 29, 1980.

ON DEFENDANTS' MOTION TO DISMISS BASED ON RES JUDICATA: CONTINGENTLY GRANTED.

Irving Morris and Joseph A. Rosenthal, Morris & Rosenthal, P.A., Wilmington, Del., and Bruce E. Gerstein and Sidney L. Garwin, Garwin & Bronzaft, New York City, for plaintiff.

Charles F. Richards, Jr., Richards, Layton & Finger, Wilmington, Del., for individualdefendants.

Robert K. Payson, Potter, Anderson & Corroon, Wilmington, Del., for defendantZapata Corp.Thomas F. Curnin, Cahill, Gordon & Reindel, New York City, special counsel to the Independent Investigative Committee of Zapata Corp.

HARTNETT, Vice Chancellor.

I

DefendantZapata Corporation("Zapata"), asserting the doctrine of res judicata ("the matter is settled by a judgment"), moved to dismiss this action, claiming that a final judgment of the U. S. District Court for the Southern District of New York("U. S. District Court") dismissing a companion action, Maldonado v. Flynn, 485 F.Supp. 274(1980) is binding as to all issues pending in this Court, even though the U. S. District Court did not consider the merits of the issues pending in this Court.Zapata urges that plaintiff("Maldonado") should have presented the issues in the present case to the U. S. District Court pursuant to the District Court's pendent jurisdiction, and because he did not, he is precluded from asserting them here.For the reasons set forth, I hold that the failure of Maldonado to present all of his theories of recovery in the prior District Court case, which arose out of the same transaction which is the subject of this litigation, precludes his assertion of these theories in this case, if the District Court judgment dismissing his claims is not overturned on appeal.

The action in this Court is a stockholder's derivative suit brought by Maldonado against Zapata and certain of its officers and directors in 1975 alleging wrongs to the corporation which occurred in 1974 because of transactions between the corporation and some of its directors.Maldonado asserts, in the present action, a breach of fiduciary duty arising from the common law.A more detailed statement of fact appears in Maldonado v. Flynn, Del.Ch., 413 A.2d 1251(1980).

During the pendency of this action Maldonado brought suit in the U. S. District Court against the same defendants, with the exception of Rene R. Wolcott, a director of Zapata who is a defendant in this action, but not in the District Court action.The federal action asserted claims under the Securities and Exchange Act of 1934 based on alleged violations of § 10(b),15 U.S.C. § 78j(b);Rule 10b-5,17 C.F.R. § 240.10b-5;§ 14(a),15 U.S.C. § 78n(a);Rule 14a-9,17 C.F.R. § 240.14a-9;and§ 7,15 U.S.C. § 78g.Maldonado also asserted in the federal action, as pendent to his securities law violation claims, the common law claims asserted in this Court.The U. S. District Court dismissed Maldonado's securities law claims under Rule 12(b)(6), Fed.R.Civ.P., and, there then being no federal claims to which the common law claims were pendent, also dismissed the common law claims.Maldonado v. Flynn, 448 F.Supp. 1032(S.D.N.Y.1978).On appeal the Second Circuit reversed the U. S. District Court's dismissal of Maldonado's § 14(a) claim and affirmed the dismissal of his § 10(b) claim.The cause was remanded to the District Court for an evidentiary hearing with respect to the § 14(a) claim, with specific instructions to the District Court to determine whether to exercise its discretionary pendent jurisdiction over the common law claims in view of United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218(1966) and the posture of Maldonado's case in this Court.Maldonado v. Flynn, 597 F.2d 789, 798(2d Cir.1979).

Prior to any determination by the U. S. District Court of whether to exercise pendent jurisdiction over the common law claims, Maldonado amended his complaint to delete those claims.The amendment left the case just as if the claims had never been asserted in the District Court, thus mooting the issue of pendent jurisdiction.Zapata subsequently moved for summary judgment in the District Court on the theory that the directors of a nominal corporate defendant in a stockholder's derivative action may compel the dismissal of a stockholder's suit when an independent and disinterested Committee of its directors, in the collective business judgment of its members, determines that the litigation is not in the corporation's best interests.The District Court, applying what it believed to be Delaware law, accepted Zapata's arguments, found that the Committee established by Zapata was independent and disinterested, and dismissed the suit without reaching the merits of the § 14(a) violation claim.Maldonado v. Flynn, 485 F.Supp. 274, 77(1980).However, on March 18, 1980, in this action, without considering the question of res judicata, I denied an identical motion for summary judgment brought by Zapata and ruled that under Delaware law an independent and disinterested committee of Zapata's directors did not have the legal power to compel dismissal of this action.I therefore, in effect, found that the ruling of the District Court was an incorrect application of Delaware law.Maldonado v. Flynn, Del.Ch., 413 A.2d 1251(1980).Both decisions are now on appeal.

Zapata, nevertheless, contends that the doctrine of res judicata bars those issues, claims or theories of recovery asserted in this case if they could have been asserted in the U. S. District Court.It urges that, under United Mine Workers v. Gibbs, supra, the District Court clearly had the power to accept pendent jurisdiction over Maldonado's common law claims, and therefore res judicata operates to bar the assertion of these common law claims in this Court even if they were never raised, or were amended out of the federal complaint.

II

In Epstein v. Chatham Park, Inc., Del.Super., 153 A.2d 180 at 184(1959), Justice Wolcott, sitting in Superior Court, described the doctrine of res judicata in general terms:

The doctrine of res judicata, briefly stated, is that a final judgment upon the merits rendered by a court of competent jurisdiction may, in the absence of fraud or collusion, be raised as an absolute bar to the maintenance of a second suit in a different court upon the same matter by the same party, or his privies.

The doctrine is judicially-created and is based on public policy requiring a definite end to litigation.It has particular vitality in our federal system of overlapping federal and state subject-matter jurisdiction because, in many cases, a plaintiff has at least two courts, one federal and one state, where he may choose to assert a claim.The doctrine of res judicata exists for many reasons, but among the most important are to prevent vexatious litigation and to promote the stability and finality of judicial decrees.Epstein v. Chatham Park, Inc., supra;Coca-Cola Co. v. Pepsi-Cola Co., Del.Super., 172 A. 260, 262(1934).The doctrine permits a litigant to press his claims but once, and requires him to be bound by the determination of the forum he has chosen, so that he"may have one day in court but not two."Malone Freight Lines, Inc. v. Johnson Motor Lines, Inc., Del.Supr., 148 A.2d 770, 775(1959).

In earlier times the doctrine of res judicata could be invoked only to bar the relitigation of the same cause of action already litigated and determined.Tusso v. Smith, Del.Ch., 156 A.2d 783(1959);Ajax Rubber Co. v. Gam, Del.Super., 130 A. 395(1925).This limitation was due in large part to the formal, rigid and technical rules of pleading then existing and the difficulty of amending pleadings.Restatement (Second) of Judgments§ 61, Comment (a)(Tent. DraftNo. 5, 1978).The modern transactional view of the doctrine of res judicata, however, does not require that the claim subsequently asserted be based on a same cause of action to be barred, but permits the doctrine to be invoked to bar litigation between the same parties if the claims in the later litigation arose from the same transaction that formed the basis of the prior adjudication.Ezzes v. Ackerman, Del.Supr., 234 A.2d 444(1967);Steigman v. Beery, Del.Ch., 203 A.2d 463(1964);Epstein v. Chatham Park, Inc., supra.The determination, therefore, whether the doctrine shall be invoked is now based on the underlying transaction and not on the substantive legal theories or types of relief which are sought.Under the modern rule, ordinarily, a transaction gives rise to only one claim regardless of the number of ways that the claim may be asserted.Restatement (Second) of Judgments§ 61, Comments (b) & (c)(Tent. DraftNo. 5, 1978).In deciding whether res judicata will bar this suit, Maldonado's claim must therefore be analyzed in the light of the transaction which he challenges; and, if his complaint in the U. S. District Court and his complaint in this Court assert different substantive theories concerning but one claim arising from but one transaction, the doctrine of res judicata may prohibit a second adjudication here.

The transaction giving rise to plaintiff's claim in the U. S. District Court was described by that Court at 448 F.Supp. 1034-1035:

Plaintiff's claims center about a stock option plan (the "plan") established in 1970 for key employees of Zapata and its subsidiaries, and certain modifications to that plan made by the Corporation's board of directors in July 1974 immediately prior to announcing a tender offer by the Corporation for its own shares.Under the original plan, which Zapata's shareholders approved on January 11, 1971, the price per share upon exercise of an option was $12.15, purchase could be made only for cash, and the options would be exercisable at five stages: 20% ninety days after the date the...