McLearn v. Cowen & Co.

• Decision Date: 16 October 1979
• Citation: 48 N.Y.2d 696,397 N.E.2d 750,422 N.Y.S.2d 60
• Parties: , 397 N.E.2d 750 Mildred A. McLEARN, Appellant, v. COWEN & CO. et al., Defendants, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 60

422 N.Y.S.2d 60

48 N.Y.2d 696, 397 N.E.2d 750

Mildred A. McLEARN, Appellant, v. COWEN & CO. et al., Defendants and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent.

Court of Appeals of New York.

Oct. 16, 1979.

James D. Burchetta, Carmel, and Robert C. Agee, for appellant

Roger J. Hawke and Thomas J. Mullaney, New York City, for respondent.

OPINION OF THE COURT MEMORANDUM.

The order of the Appellate Division should be affirmed, with costs.

As that court held, plaintiff-appellant's present claim is precluded by the determination adverse to her in the Federal court action. If one accepts the contention now advanced by her that recovery on the theory of breach of common-law fiduciary duties was not pleaded in the Federal action, it could have been. On the other hand, if one accepts the analysis of the pleadings advanced by the dissenter, the common-law cause of action was separately pleaded in the Federal action. In any event it is not disputed that both the Federal statutory claim and the common-law claim arose out of the same series of connected transactions. The disposition of the Federal action on the merits for failure to state a cause of action extinguished all rights plaintiff may have had to remedies against Merrill Lynch with respect to all or any part of the series of connected transactions out of which the Federal action arose. (Matter of Reilly v. Reid, 45 N.Y.2d 24, 407 N.Y.S.2d 645, 379 N.E.2d 172; see Restatement, Judgments, 2d (Tent Draft No. 1, 1973), § 61.) This rule applies to extinguish theories of recovery not presented and remedies not demanded in the Federal action (see Restatement, Judgments, 2d (Tent Draft No. 1, 1973), § 61.1).

The only basis on which the present claim would not now be precluded would be that plaintiff-appellant's present common-law claim could not have been asserted in the Federal action. Although it is conceded that the common-law cause of action could have been considered only under the pendent jurisdiction of the Federal court and that the Federal court could have declined to exercise such jurisdiction, unless it is clear that the Federal court as a matter of discretion did decline or would have declined to exercise that jurisdiction, the State action is barred (see Id., § 61.1, Comment E and Illustration 10). In the present instance, on the record in the Federal action submitted to us it is not clear that the Federal court did decline or would have declined to exercise its pendent jurisdiction. That issue appears not to have been raised or even considered by the parties or by the court. Plaintiff-appellant made no application for any clarification or limitation with respect to the scope of the dismissal of the Federal action.

Plaintiff-appellant's original complaint, setting forth 48 counts in 103 paragraphs running to 39 pages had been dismissed with leave to file an amended complaint. Defendants-respondents moved to dismiss the amended complaint (all but 8 of the 103 paragraphs of which were taken verbatim from the original complaint) for failure to allege fraud with sufficient particularity as required by subdivision (b) of rule 9 of the Federal Rules of Civil Procedure (U.S.Code, tit. 28). The Federal court granted the motion to dismiss with the statement "The complaint still fails to set forth the facts and circumstances of the alleged fraud and must be dismissed." This dismissal was on the merits for failure to state a cause of action. ^*

Following an affirmance of this dismissal on plaintiff-appellant's appeal to the United States Court of Appeals for the Second Circuit, leave was sought to replead again. The District Court denied this application with the observation "Inasmuch as plaintiff fully perfected her appeal to the Court of Appeals, and since the Court of Appeals did not remand the action to this court with direction to permit plaintiff to replead, this court has no authority to allow plaintiff leave to serve and file an amended complaint." Nothing in this record supports the slightest inference that a common-law cause of action was dismissed for refusal of the Federal court to exercise its pendent jurisdiction or that the court would have declined to exercise that jurisdiction. There is thus no basis for failing to give preclusive effect to the disposition in the Federal forum, thereby barring the claim plaintiff-appellant seeks now to prosecute.

COOKE, Chief Judge (dissenting).

Plaintiff should not be foreclosed from asserting her State-based claim by the disposition of her action in Federal court. Plaintiff's Federal complaint alleged the Federal securities laws as the predicate for the District Court's jurisdiction and contained references to defendant's breach of common-law fiduciary duties, negligence and unprofessional conduct. The District Court, noting that plaintiff's complaint alleged violation of the antifraud provisions of the Federal statutes and generally a fraud based on breach of fiduciary duty, dismissed the complaint for failure to plead fraud with sufficient particularity as required by subdivision (b) of rule 9 of the Federal Rules of Civil Procedure. That dismissal operates as an adjudication on the merits (Fed.Rules Civ.Pro., rule 41, subd. (b)).

Although the District Court had the power to consider theories of recovery grounded in State law under the doctrine of pendent jurisdiction, the ambiguity in the opinion and the pleadings do not permit the conclusion that the court did or would have exercised jurisdiction over any State claims that might have been asserted. Indeed, it is not at all clear whether plaintiff asserted a claim grounded in State law or whether the Federal court considered claims other than those grounded in Federal law.

Both the majority and Judge Meyer in dissent note that theories of recovery jurisdictionally assertable in a prior action are precluded in a later suit when it is clear that the court in the first action would have exercised jurisdiction as a matter of discretion (Restatement, Judgments, 2d (Tent. Draft No. 5, 1978), § 61.1). There is no quarrel with this proposition. But by barring plaintiff's complaint, the majority effectively presumes that the Federal court would have exercised jurisdiction in this case. Such presumption is unwarranted where, as here, the Federal claim is dismissed on the pleadings prior to trial (see Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 L.Ed.2d 218). Indeed, the presumption is to the contrary. An exercise of pendent jurisdiction in such circumstances would be contrary to Federal practice in the Second Circuit (see, e. g., CES Pub. Corp. v. St. Regis Pub., 531 F.2d 11; Kavit v. Stamm & Co., 491 F.2d 1176; Iroquois Inds. v. Syracuse China Corp., 417 F.2d 963, cert. den. 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561; Altman v. Knight, 431 F.Supp. 309; but see Gem Corrugated Box Corp. v. National Kraft Container Corp., 427 F.2d 499, 501, n. 1) and possibly an abuse of discretion (see Nolan v. Meyer, 520 F.2d 1276, cert. den. 423 U.S. 1034, 96 S.Ct. 567, 46 L.Ed.2d 408; Braunstein v. Laventhol & Horwath, D.C., 433 F.Supp. 1077). It must be assumed, therefore, that the Federal court here would have declined to exercise its jurisdiction once it dismissed the Federal claim prior to trial. The procedural ambiguities present in this case do not justify a different conclusion.

The order of the Appellate Division should be reversed, and the order of Supreme Court reinstated without prejudice to motion properly made under CPLR 3211 (subd. (a), par. 7).

MEYER, Judge (dissenting).

I respectfully dissent. In my view the majority fails to follow prior Res judicata rulings of this court and misconceives Federal case law and rules relating to pendent jurisdiction.

Res judicata is a policy essential to our jurisprudence both to conserve judicial resources and to prevent the harassment by one party of another that would result were there no rule proscribing relitigation of an issue once fairly decided. But we have been at pains to make clear that in applying the policy courts must take care that a party not be excluded from the day in court to which every litigant is entitled (cf. Gramatan Home Investors Corp. v. Lopez, 46 N.Y.2d 481, 485, 414 N.Y.S.2d 308, 311, 386 N.E.2d 1328, 1331). To that end we have held that a litigant who claims the benefit of a former judgment has the burden of proving that the issue which he urges is precluded was involved in the prior litigation, either by actual determination or by necessary implication. (Bronxville Palmer v. State of New York, 18 N.Y.2d 560, 277 N.Y.S.2d 402, 223 N.E.2d 887; People ex rel. Village of Chateaugay v. Public Serv. Comm., 255 N.Y. 232, 74 N.E. 637). Since the Federal court decisions in plaintiff's prior action are, as the factual analysis below demonstrates and as the majority concedes, at best equivocal with respect to the basis for dismissal of plaintiff's claim against Merrill Lynch, it was Merrill Lynch's burden, not plaintiff's, to establish that plaintiff's claim against it was dismissed on the merits. Yet the majority holds plaintiff precluded because She "made no application for any clarification or limitation with respect to the scope of the dismissal of the Federal action." To require her rather than Merrill Lynch ¹ to seek such clarification is nothing less than a shifting of the burden of proof and constitutes a major departure from the policy we have heretofore uniformly followed.

An understanding of the fallacy in the majority's pendent jurisdiction reasoning requires analysis of the complaint in the Federal action and of the decisions of the Federal courts with respect to that complaint. The first three paragraphs of the complaint predicate jurisdiction of the court upon the Investment Advisors Act of 1940 and the Securities and Exchange Act of 1934 and venue upon the residence of the parties and the activities of the defendants. The complaint then...