Pilie' & Pilie' v. Metz

• Decision Date: 12 September 1989
• Docket Number: No. 88-C-0707,88-C-0707
• Citation: 547 So.2d 1305
• Court: Louisiana Supreme Court
• Parties: PILIE & PILIE v. Donna Graham, wife of/and Timothy METZ. 547 So.2d 1305

Page 1305

547 So.2d 1305

PILIE & PILIE v. Donna Graham, wife of/and Timothy METZ.

No. 88-C-0707.

547 So.2d 1305

Supreme Court of Louisiana.

Sept. 12, 1989.

Rehearing Denied Oct. 12, 1989.

M. Arnaud Pilie, New Orleans, for respondent.

Stephen Murray, Patricia Murray, New Orleans, for applicants.

DENNIS, Justice.

We are called upon to determine the res judicata or claim preclusion effect of a federal diversity court judgment upon an action brought in the court of a state other than the one in which the diversity court sat. A law firm sued its former client for additional legal fees pursuant to a contingent fee contract and for breach of contract damages after having been awarded a substantial percentage of the client's personal injury recovery by a federal diversity court in another state. The trial court sustained the former client's exception of res judicata and dismissed the law firm's suit. Applying Louisiana res judicata law, the court of appeal held that the law firm's claims were not precluded by the federal judgment. Pilie & Pilie v. Metz, 521 So.2d 590 (La.App. 1st Cir.1988).

We reverse. Federal rather than state law controls in determining the effect of a judgment rendered by a federal diversity court sitting in another state. While there is disagreement as to which is the correct federal rule, i.e., whether res judicata should be determined by the intramural federal law or by the law of the state in which the prior diversity court sat, it is clear that the second forum is not free to apply its own law. Rather, it must give full faith and credit to the federal judgment by following one of the federal rules. We need not decide in the present case which federal rule is preferable, however, because the competing rules applicable to the issues here are identical. Under either federal rule, the law firm's claim to enforce a contingent fee contract and assignment agreement to recover attorneys' fees and the firm's claim to re cover damages for breach of these contracts are barred; these claims are res j udicata because they are rights to remedies arising out of the same transact i on § as the claims that the law firm previously asserted and caused to be adj ud ica ted in the federal court. We reserve judgment on whether the law firm's th ird claim, quantum meruit demanded for legal services in connection with f reez e dam age to the client's dwelling, was related to the same transaction or conn ected transactions as its claim in the federal action, and we remand the case to the trial court for an evidentiary hearing and a ruling on this issue.

1. Background

After suffering serious injuries in a helicopter crash in New Jersey, Timothy Metz, a Louisiana resident, employed Pilie & Pilie, a New Orleans law firm, to assert damage claims against the owner and operator of the aircraft. In a single attorney-client contract, Metz employed Pilie to prosecute his personal injury claim for a contingent fee of one-third of the amount recovered, engaged Pilie to represent him and D & J Manufacturing, Inc. in "other legal matters" and agreed to pay Pilie additional fees for the "other legal matters" out of his personal injury recovery. With Metz's approval, Pilie engaged Speiser & Krause, a New York law firm, to file a diversity action and act as trial counsel in the United States District Court for the Eastern District of New York. In a separate agreement, Pilie and Speiser agreed to share the contingent fee with 65% to go to Pilie and 35% to Speiser. The case was tried, but a judgment in Metz's favor was reversed on appeal. Shortly before the case was to be retried, Metz and the defendants agreed to settle the case for $2,350,000.

To facilitate the settlement, Speiser and Metz agreed to reduce the contingent fee to 28% of the amount recovered, but Pilie insisted that the fee should be maintained at 33 1/3%. Also, Pilie and Speiser disagreed over how to divide the fee between them. Speiser moved the court, on behalf of itself and Metz, to order Pilie and other parties to show cause why the proceeds of the settlement should not be distributed to Metz, his attorneys and his creditors in accordance with a proposed schedule. Pilie filed an answer denying the court's jurisdiction and a cross-claim against Metz asking the court to reject the distribution proposed by Metz and Speiser and instead to order the proceeds allocated according to the terms of Pilie's contingent fee contract with Metz and an assignment agreement between Metz, his attorneys, and a bank. In the cross-claim Pilie set out an alternative proposal for the distribution of the settlement proceeds that included the payment to Pilie of an extra $100,000 in non-contingent legal fees.

At a hearing in the federal court in New York, Speiser filed an affidavit by Metz supporting the Speiser-Metz distribution proposal and opposing Pilie's cross-claim, while a member of the Pilie firm appeared and urged that the distribution proposed in the cross-claim be ordered. On August 2, 1985, the court ordered a distribution of the settlement proceeds that generally followed the Speiser-Metz motion and proposed settlement schedule, but also awarded Pilie an additional $100,000 over and above its expenses and share of fees under the contingent fee contract, as Pilie's "non-contingent fee for professional services." ¹ Pilie did not appeal from the court's judgment.

Four months later, on December 6, 1985, Pilie filed the present lawsuit in the Civil District Court for Orleans Parish. The case was transferred to the 22nd Judicial District Court for St. Tammany Parish, Metz's domicile. In its petition Pilie alleged the background facts set forth above and contended that Metz was indebted to it in the sum of approximately $152,000 plus an additional amount in quantum meruit to be fixed by the court. Pilie averred that this debt consisted of three claims: (1) $62,833.33 as the difference between the amount to which Pilie was entitled under the contingent fee contract and the sum it received pursuant to the federal court order; (2) $89,166.67 for damages sustained by Pilie due to Metz's breach of the contingent fee contract and the bank assignment agreement; and (3) an amount to be fixed by the court as a reasonable value for legal services rendered by Pilie to Metz in connection with disputes with insurance companies and others resulting from damages to Metz's home in December 1983 due to severe freezes and bursted pipes.

Metz responded to Pilie's petition by filing an exception of res judicata. After reviewing the record and hearing arguments of counsel, the trial court sustained the exception and dismissed Pilie's claims. The trial court reasoned that Pilie's rights and remedies for a larger contingent fee under both the contingent fee contract and the assignment agreement had been asserted in the diversity proceeding and rejected by the federal court judgment. The court also found that the judgment compensated Pilie for all legal services rendered in connection with Metz's 1983 winter freeze problems.

Pilie appealed and the court of appeal reversed. Pilie & Pilie v. Metz, 521 So.2d 590 (La.App. 1st Cir.1988). The appellate court concluded that Pilie's contingent fee contract claim was not barred, even though the law firm had asserted that contract as well as the bank assignment contract in the federal litigation, because in the earlier proceeding Pilie had sought only "65 percent of the $650,000 in attorney fees which the parties, excluding itself, had agreed upon" rather than "specific performance of the one-third ( 1/3) contingent contract itself." Id. at 593. Similarly, the court of appeal held the damage claim was not barred because "[i]n the New York proceedings, plaintiff sought specific performance of the [assignment agreement], while in the instant suit, plaintiff seeks damages for defendants' alleged failure to comply with the terms of this agreement." Id. The court of appeal concluded that the quantum meruit claim was not barred despite the federal court's award to Pilie of $100,000 in attorney's fees unrelated to the personal injury case because "there is no indication of the nature of these services or that they were the same legal services for which plaintiff now seeks recovery." Id.

This court granted certiorari to determine whether the correct principles of res judicata had been applied by the court of appeal. 523 So.2d 219 (1988).

2. Choice of Law

The court of appeal assumed that it was free to rely exclusively upon Louisiana res judicata law in holding that plaintiff's claims were not precluded by the earlier judgment. Because the prior judgment was rendered by a federal court, rather than a court of this state, the question is presented whether a state court may apply its own res judicata law or must follow federally mandated precepts in determining the effect of a judgment rendered by a federal diversity court based on the law of another state.

In determining whether federal law must be applied, the fundamental issue is whether a state is free to regulate the binding authority of a judgment of a federal court established pursuant to the federal Constitution and acts of Congress. The answer to this question is well settled, although it has not been stated as frequently or explicitly as might be expected. No single constitutional or statutory provision explicitly requires the application of federal law, but the principle that a state court must apply federal law in deciding upon at least the central core of res judicata effects of any federal court judgment is immanent within the constitution and laws establishing our federal system. See 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure Sec. 4468 (1981); Degnan, Federalized Res Judicata, 85 Yale L.J. 741, 749 (1976). A constitution that requires state courts to give full faith and credit to the judgments of other state courts could not contemplate that state courts should be...