McNellis v. First Federal Sav. & L. Ass'n of Rochester, NY
Decision Date | 27 July 1966 |
Docket Number | Docket 30327.,No. 357,357 |
Citation | 364 F.2d 251 |
Parties | Phillip J. McNELLIS as Trustee of Donald S. Potter, Bankrupt et al., Plaintiffs-Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER, NEW YORK, Defendant-Appellee. |
Court | U.S. Court of Appeals — Second Circuit |
Laurence Sovik, Syracuse, N. Y. (Smith, Sovik, Terry, Kendrick, McAuliffe & Schwarzer, Syracuse, N. Y., on the brief), for plaintiffs-appellants.
Carl Angeloff, Rochester, N. Y. (Robinson, Williams, Brown, Robinson & Angeloff, Frank Aloi, Rochester, N. Y., on the brief), for defendant-appellee.
Before LUMBARD, Chief Judge, and MOORE and FEINBERG, Circuit Judges.
Appellants, two trustees in bankruptcy, appeal from an order of the District Court for the Northern District of New York, which granted appellee's motion for summary judgment and dismissed the complaint. In a memorandum opinion, Judge Brennan held that the principles of res judicata compelled this result. For reasons set forth below, we reverse.
In November 1963, appellants sued defendant-appellee First Federal Savings and Loan Association of Rochester ("First Federal") in the New York Supreme Court, Onondaga County, in a two-count complaint. The first count alleged that plaintiffs were the trustees in bankruptcy of Randolph House Motor Hotel Corp. ("Randolph"), Donald S. Potter, Jackson M. Potter, and Potter Securities Corporation ("Potter Corp."), all adjudicated bankrupt in June 1963; that at all relevant times Donald Potter was insolvent and owned all the stock of Randolph, which was also insolvent; that Potter Corp. was a "dummy" organized by the Potters to hold title to certain properties for Donald Potter in order to conceal usurious transactions; that title to certain premises passed without consideration back and forth from Donald Potter to Potter Corp. several times and finally from that corporation to Randolph; that Donald Potter paid for the construction of a motor hotel on the premises; that a substantial portion of the materials and services for the construction was furnished by unsecured creditors of Donald Potter and Randolph; that on or about April 27, 1962, First Federal entered into a mortgage commitment agreement with Potter Corp. on behalf of Donald Potter, under which Donald Potter paid First Federal $62,000 on April 27, 1962 and again on June 21, 1962; and that each payment, although characterized as a "mortgage origination fee," was actually intended to be interest on mortgage indebtedness in excess of that authorized by the New York General Business Law, McKinney's Consol. Laws, c. 20 and federal statutes relating to banks and banking. The second count of the complaint alleged that the two payments of $62,000 were fraudulent dispositions of the bankrupts' property; that the payments were made without fair consideration and in violation of the New York Debtor and Creditor Law, McKinney's Consol. Laws, c. 12; and that they were made when defendant knew or should have known the bankrupts were insolvent and unable to pay their liabilities as they would mature. The complaint sought judgment for $248,000, with interest.1
Both sides moved for summary judgment in the state court action; plaintiffs' motion was later withdrawn. While the motions were pending, plaintiffs moved for permission to file and serve a supplemental complaint as "a third separate and distinct cause of action." After incorporating the original complaint, the supplemental complaint alleged that Donald Potter paid a total of $55,144 to First Federal on the mortgage ($3,100 on August 2, 1962, $26,022 on September 6, 1962, and $26,022 on September 21, 1962); that these payments were in violation of New York Debtor and Creditor Law, §§ 273-276, New York Banking Law, McKinney's Consol. Laws, c. 2, § 380-e, and section 67d(2) of the Bankruptcy Act; and that defendant knew at the time of the payments that the bankrupts were insolvent and unable to pay their liabilities. The additional relief prayed for was a judgment of $110,2882 and attorneys' fees.
In May 1964, while these motions were pending in the state court, appellants commenced the action in the court below. The federal complaint alleged virtually everything in the state complaints and a few more details of the transactions in question were provided. The complaint alleged that the two $62,000 payments represented illegal interest in violation of New York Banking Law § 380-e and Article 10 of the New York Debtor and Creditor Law, and that the second $62,000 payment and the three subsequent payments totalling $55,144 were in violation of section 67d of the Bankruptcy Act and Article 10 of the New York Debtor and Creditor Law. The complaint sought double damages ($248,000) on the claims arising out of the two $62,000 payments and single damages ($55,144) on the later three payments.
An appeal was taken from this decision but was later dismissed in December 1965.3
At this point, First Federal understandably renewed its motion in the court below for summary judgment. Apparently, plaintiffs did not dispute below that the state court decision barred their federal action insofar as it sought relief because of a usurious "origination fee." Plaintiffs did insist, however, that the claim for $55,144 based on the three subsequent payments on the mortgage in August and September 1962 was not barred. Judge Brennan held that since the state court determined that usury rules were inapplicable, the August and September payments made on a valid mortgage could hardly be invalidated. Judge Brennan also relied on the state court denial of permission to file the supplemental complaint, and the identity between the proposed third cause of action contained therein and the relevant portion of the instant complaint. He concluded that "the principle of res judicata" required granting defendant's motion for summary judgment.
Appellants' only contention here is that the court misapplied the principles of res judicata.4 What those principles are in general is not difficult to state; applying them to specific situations is sometimes another matter. Briefly, where a judgment has been rendered in an action between two parties for a sum of money and there is subsequently another action between the same parties, the first judgment has varying conclusive effect. If the second action is based upon the same cause of action as the first, the prior judgment is conclusive as to all matters which were litigated or might have been litigated in the first action. However, if the second action is based upon a different cause of action, the prior judgment is conclusive between the parties only as to matters actually litigated and determined by the first judgment; that judgment is not conclusive as to matters which might have been, but which were not, litigated and determined in the prior action. Cromwell v. County of Sac, 94 U.S. 351, 352-353, 24 L.Ed. 195 (1877); Restatement, Judgments, 158-59 (1942). The obvious beginning for an inquiry into res judicata is a determination of what was claimed and decided in the first action. The state court complaint alleged that payments of $62,000, in April and June 1962, represented usurious interest (count one) and were a fraud on creditors (count two). The state court held that a corporate-borrower could not avail itself of usury rules. The only reference to the fraudulent transfer aspects of the complaint was that Randolph was solvent on June 21, 1962 (the date of the second $62,000 payment and of transfer of title to Randolph from Potter Corp.).5 The court also denied without discussion permission to file a supplemental complaint substantially identical to the portion involved here of the complaint below.
Putting the supplemental complaint to one side for the moment, we cannot see how the dismissal of counts one and two of the state court complaint, based on payments in April and June 1962, bars the action here to recover other types of payments in August and September. Although analysis is rendered somewhat difficult by the jumble of theories and allegations in the complaints and briefs, it is quite clear that the federal...
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