Paramount Pictures Corp. v. Allianz Risk Transfer AG

• Decision Date: 20 February 2018
• Docket Number: No. 16,16
• Citation: 96 N.E.3d 737,73 N.Y.S.3d 472,31 N.Y.3d 64
• Parties: PARAMOUNT PICTURES CORPORATION, Appellant, v. ALLIANZ RISK TRANSFER AG, et al., Respondents, et al., Defendant.
• Court: New York Court of Appeals Court of Appeals

31 N.Y.3d 64

96 N.E.3d 737

73 N.Y.S.3d 472

PARAMOUNT PICTURES CORPORATION, Appellant,

v.ALLIANZ RISK TRANSFER AG, et al., Respondents, et al., Defendant.

No. 16

Court of Appeals of New York.

Decided February 20, 2018

Kendall Brill & Kelly LLP, Los Angeles, California (Richard B. Kendall, of the California bar, admitted pro hac vice, of counsel), and Pillsbury Winthrop Shaw Pittman LLP, New York City (E. Leo Milonas and Edward Flanders of counsel), for appellant.

Pryor Cashman LLP, New York City (James A. Janowitz, William L. Charron, Bryan T. Mohler and Benjamin S. Akley of counsel), and Harris Beach PLLC, Albany (Victoria A. Graffeo of counsel), for respondents.

OPINION OF THE COURT

GARCIA, J.

Nearly 10 years ago, following an unsuccessful investment venture, the parties began litigating their dispute in federal court. The district court entered judgment in favor of Paramount Pictures Corporation—the defendant in that action—and that judgment was affirmed on appeal. Paramount—now the plaintiff—subsequently initiated this state court action. In this appeal, defendants assert that Paramount's claim is barred by res judicata because it should have been asserted as a counterclaim in the earlier federal action. We agree.

I.

In 2004, Melrose Investors LLC was formed as a special purpose vehicle to facilitate investment in certain films produced and distributed by plaintiff Paramount Pictures Corporation. Defendants Allianz Risk Transfer AG, Marathon Structured Finance Fund, L.P., Newstar Financial Inc., and Munich Re Capital Markets New York, Inc. (the investors) invested in Melrose's debt and equity.

Prior to investing, the parties exchanged and executed a number of documents, including a private placement memorandum (PPM) and a subscription agreement. The subscription agreement contained a number of representations and warranties, including, among others, a waiver provision and a covenant not to sue. Section 4(s) of the subscription agreement provided that Paramount had not "made any express or implied representation, warranty, guarantee or agreement, written or oral" to the investors regarding a number of specified matters—for instance, the manner of distribution of any films. The next paragraph, section 4(t), provided that each investor "waives and releases all claims against Paramount" or any of its affiliates "arising out of, or in connection with, the offering of the Securities," and further "waives and releases Paramount" and its affiliates from "liability arising out of the matters described in paragraph (s) above, and agrees that in no event shall it assert any claim or bring any action contradicting the acknowledgements and agreements in this paragraph or in Paragraph (s) above."

In December 2008, the investors brought suit in the District Court for the Southern District of New York, asserting claims for securities fraud (a federal question), common-law fraud (a state-law cause of action), and unjust enrichment (a state-law cause of action).¹ The investors alleged that they had relied on "Paramount's knowing misrepresentations and omissions of information material to [the investors'] decision to invest in securities." In particular, the investors claimed that Paramount had induced them to invest through "disclosures in the PPM stating that Paramount regularly employed specific risk mitigation techniques when producing and distributing films," but that, "contrary to the specific and repeated representations in the PPM," Paramount "materially altered its production and distribution plans" with regard to the Melrose investment so as to "dramatically reduce the use of a key risk mitigation technique described in the PPM." In its answer, Paramount asserted, among other things, (i) that the investors' claims were barred because, contrary to the allegations, they had "relied on documents and information apart from the PPM in making their investment decisions," and (ii) that one of those documents, the subscription agreement, contained an "express waiver" barring those claims. Paramount did not assert any counterclaims or otherwise allege that the investors had breached the covenant not to sue.

Following a bench trial, Paramount moved for entry of judgment in its favor. The district court granted Paramount's motion, finding "no basis for disregarding the [S]ubscription [A]greement" and "no legal reason why th[e] claim waiver would not apply as a matter of law." Because the waiver was "valid and enforceable," the court determined that "plaintiff investors waived their claims." The court further noted: "In paragraph 4 (t) [of the subscription agreement] there is a waiver. And there is an agreement by the plaintiffs in no event to bring any claim. As I said, I do find that is binding." The investors appealed and the Second Circuit affirmed, holding that the investors "failed to establish the factual premise of their claims, and the district court correctly dismissed the complaint" ( Marathon Structured Finance Fund, LP v. Paramount Pictures Corp., 622 Fed.Appx. 85, 87 [2d Cir. 2015] ).

While the investors' appeal was pending in the Second Circuit, Paramount commenced this action in Supreme Court, alleging that the investors had breached the covenant not to sue in the subscription agreement by filing the federal action.² Paramount seeks compensatory damages of not less than $8 million—the attorneys' fees it allegedly incurred in the federal action, plus interest. The investors moved to dismiss the complaint, arguing, among other things, that Paramount's state court action was barred by res judicata because Paramount was required, and failed, to raise its claim as a compulsory counterclaim in the federal suit. Paramount opposed the motion.

Supreme Court denied the investors' motion to dismiss. The court "decline[d] to apply FRCP 13(a)'s compulsory counterclaim rule to support [the investors'] res judicata defense," reasoning that New York "has a permissive counterclaim rule that was enacted by the legislature," and it would "not be proper" to ignore that rule.

The Appellate Division unanimously reversed, granting the investors' motion and dismissing Paramount's complaint ( Paramount Pictures Corp. v. Allianz Risk Transfer AG, 141 A.D.3d 464, 36 N.Y.S.3d 11 [1st Dept. 2016] ). While noting that "New York's permissive counterclaim rule would save [Paramount's claim] from the traditional bar of res judicata," the court determined that "the inquiry does not end there where the prior action was adjudicated in a compulsory counterclaim jurisdiction" ( id. at 467, 36 N.Y.S.3d 11 ). The Court then determined that Paramount's claim was compulsory under rule 13(a) of the Federal Rules of Civil Procedure because "[i]t existed at the time [Paramount] served its answer to the complaint in the federal action and ‘arises out of the transaction or occurrence that is the subject matter’ of defendants' federal claim(s)" ( id. [citations omitted] ). Though it found no "binding precedent ... hold[ing] that state courts must apply Federal Rules of Civil Procedure rule 13(a)," the Appellate Division determined that "the later assertion in a state court action of a contention that constituted a compulsory counterclaim in a prior federal action between the same parties is barred under the doctrine of res judicata" ( id. at 468, 36 N.Y.S.3d 11 [citation omitted] ).

We granted Paramount's motion for leave to appeal ( 28 N.Y.3d 909, 2016 WL 6840114 [2016] ).

II.

The viability of Paramount's instant claim hinges on the preclusive effect of the parties' prior federal judgment. As the United States Supreme Court has instructed, "[t]he preclusive effect of a federal-court judgment" on a subsequent state court action is "determined by federal common law" ( Taylor v. Sturgell, 553 U.S. 880, 891, 128 S.Ct. 2161, 171 L.Ed.2d 155 [2008] ; see also Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507, 121 S.Ct. 1021, 149 L.Ed.2d 32 [2001], quoting Deposit Bank of Frankfort v. Board of Councilmen of the City of Frankfort, 191 U.S. 499, 514–515, 24 S.Ct. 154, 48 L.Ed. 276 [1903] ). "For judgments in federal-question cases," the "uniform federal rules of res judicata" apply ( Taylor, 553 U.S. at 891, 128 S.Ct. 2161 [internal quotation marks and brackets omitted] ) whereas, "[f]or judgments in diversity cases, federal law incorporates the rules of preclusion applied by the State in which the rendering court sits" ( id. at 891 n. 4, 128 S.Ct. 2161, citing Semtek, 531 U.S. at 508, 121 S.Ct. 1021 ). The United States Supreme Court "has the last word on the claim-preclusive effect of all federal judgments" ( Semtek, 531 U.S. at 507, 121 S.Ct. 1021 ).

The Supreme Court has not squarely addressed the applicable federally prescribed rule of decision—the uniform federal rules or state preclusion law—in a case where, as here, the judgment in the parties' federal action encompassed both federal- and state-law claims.³ Where federal and state preclusion law dictate the same result, the applicable law is irrelevant; whether analyzed under federal law or under state law (or, as the dissent puts it, analyzed "separately"), the outcome is the same. But where federal law would bar the claim and state law would not, we anticipate (and the dissent apparently agrees) that federal preclusion doctrine will supply the applicable rule of decision, barring the claim. Under either scenario, the outcome prescribed by federal law will control. And so, under either scenario, a state law analysis is unnecessary.⁴

In the absence of a federal question claim, the res judicata rules of New York—the "State in which the rendering court" sat—would ordinarily govern the preclusive effect of state-law claims ( Semtek, 531 U.S. at 508, 121 S.Ct. 1021 ). But "even when States are allowed to give federal judgments no more than the effect accorded to state judgments"—i.e., in diversity cases—"that disposition is by direction of [the United States Supreme Court], which has the last word on the...