Q Intern. Courier Inc. v. Smoak

• Citation: 441 F.3d 214
• Decision Date: 20 March 2006
• Docket Number: No. 05-1150.,05-1150.
• Parties: Q INTERNATIONAL COURIER, INCORPORATED, Plaintiff-Appellant, v. Glenn SMOAK; Jack L. Wuerker; Brendan Kennedy; Dennis Cornelius; Tim Gay & Associates, PC, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 214

441 F.3d 214

Q INTERNATIONAL COURIER, INCORPORATED, Plaintiff-Appellant, v. Glenn SMOAK; Jack L. Wuerker; Brendan Kennedy; Dennis Cornelius; Tim Gay & Associates, PC, Defendants-Appellees.

No. 05-1150.

United States Court of Appeals, Fourth Circuit.

Argued: December 1, 2005.

Decided: March 20, 2006.

ARGUED:

Craig Crandall Reilly, Richards, McGettigan, Reilly & West, P.C., Alexandria, Virginia, for Appellant. Patrick Hyung-Jin Kim, Williams & Connolly, Washington, D.C.; Richard Thomas Tomar, Karp, Frosh, Lapidus, Wigodsky & Norwind, P.A., Rockville, Maryland, for Appellees.

ON BRIEF:

L. Peter Farkas, Robert H. Morse, Farkas & Morse, L.L.P., Washington, D.C., for Appellant. J. Philip Kessel, Jack A. Gold, Karp, Frosh, Lapidus, Wigodsky & Norwind, P.A., Rockville, Maryland, for Appellee Glenn Smoak; John K. Villa, Richard A. Olderman, Robert M. Cary, Williams & Connolly, L.L.P., Washington, D.C., for Appellee Jack L. Wuerker; Haig V. Kalbian, Mark B. Sandground, Jr., Kalbian & Hagerty, L.L.P., Washington, D.C., for Appellees Brendan Kennedy and Tim Gay & Associates, P.C.; William P. Dolan, Philip J. Harvey, Venable, L.L.P., Vienna, Virginia, for Appellee Dennis Cornelius.

Before NIEMEYER, WILLIAMS, and SHEDD, Circuit Judges.

Reversed and remanded by published opinion. Judge SHEDD wrote the opinion, in which Judge NIEMEYER and Judge WILLIAMS joined.

OPINION

SHEDD, Circuit Judge.

Glenn Smoak filed an action in Virginia state court ("the first action") against Q International Courier, Inc. ("Quick") seeking a declaration that Quick used an improper basis appraising the value of Smoak's stock after Smoak exercised his option requiring Quick to purchase his stock. Quick removed this first action to federal district court in the Eastern District of Virginia based on diversity jurisdiction. Quick also filed a counterclaim against Smoak, alleging that Smoak used an improper basis for his stock appraisal and breached the parties' stock option agreement. After a bench trial, the district court entered judgment substantially in favor of Quick.

Four months after the first action concluded, Quick filed this second action in federal district court seeking damages against Smoak and Jack L. Wuerker, Smoak's lawyer; Dennis Cornelius, Smoak's business advisor; Brendan Kennedy, Smoak's stock appraiser; and Tim Gay & Associates ("TGA"), Smoak's appraisal firm. The district court dismissed this second action based on the federal law of res judicata.

Quick now appeals, asserting that the district court erred in applying the federal law of res judicata rather than the Virginia law of res judicata, and that its claims are not subject to dismissal under the Virginia law of res judicata. For the following reasons, we reverse and remand.

I.

In reviewing a district court's grant of a motion to dismiss, we accept as true the plaintiff's well-pleaded allegations. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). When entertaining a motion to dismiss on the ground of res judicata, a court may take judicial notice of facts from a prior judicial proceeding when the res judicata defense raises no disputed issue of fact. Andrews v. Daw, 201 F.3d 521, 524 n. 1 (4th Cir.2000). We review de novo a district court's grant of a motion to dismiss based on res judicata. Id. at 524.

In 1997, Smoak sold his company to Quick, a private corporation, in return for 1,166 shares of Quick stock and other consideration. The parties' agreement gave Smoak until September 2002 the option of requiring Quick to repurchase all of his stock at its "fair market value . . . as determined by independent appraisers." J.A. 29. If Smoak exercised his option, the agreement specified that each side would appoint a qualified appraiser and, if their respective independent stock appraisals differed by more than 15%, the parties would jointly appoint a third appraiser to conduct another appraisal.

Smoak exercised his option in August 2002, a month before his option expired. Cornelius advised Smoak to appoint Kennedy of TGA as his independent appraiser. Even though the stock option agreement provided that Smoak's stock should be appraised at its "fair market value," the appraisal done by Kennedy that was presented to Quick was based instead on the stock's "fair value." This appraisal essentially valued Smoak's stock on a pro rata basis with all the outstanding stock of the corporation, even though Smoak owned only approximately 10% of Quick's total shares of stock. This "fair value" appraisal by Kennedy valued Smoak's stock at approximately $4 million. Quick's "fair market value" appraisal, on the other hand, valued Smoak's stock at approximately $1.1 million. Because these appraisals differed by more than 15%, the requirement under the stock option agreement that both sides jointly appoint a third appraiser was triggered.

Rather than attempt to agree on a third appraiser, Smoak instead filed the first action, alleging that the parties actually intended in their agreement to value Smoak's stock on its "fair value" rather than its "fair market value." Smoak sought to reform the stock option agreement based either on mutual mistake or Quick's fraudulent conduct in memorializing their agreement.

In response, Quick filed a counterclaim in the first action, seeking a declaration that the stock option agreement required that Smoak's stock be appraised at its "fair market value" and that Quick's $1.1 million appraisal was the only valid appraisal submitted by the parties under the stock option agreement. Quick also alleged that Smoak breached the agreement by filing the first action rather than jointly appointing a third appraiser. Moreover, Quick sought damages for "loss of management time" and attorneys' fees resulting from Smoak's preempting the specified appraisal process by filing the first action.

Quick alleges that it learned during the course of discovery and the trial of the first action that Kennedy had actually provided several different appraisals to Smoak before submitting his final "fair value" appraisal to Quick. For instance, Kennedy based his first appraisal on "fair market value," as specified in the stock option agreement, and valued Smoak's stock at approximately $1.8 million. After learning that Quick had recently purchased another person's stock, Kennedy used that transaction as a comparable and lowered the "fair market value" of Smoak's stock to approximately $1.5 million. Disappointed with how low these appraisals were, Smoak met with his codefendant advisors and determined that — although the stock option agreement expressly provided for basing the stock repurchase on "fair market value" — the original intent of the parties was to use "fair value." Based on this new strategy, Kennedy appraised the "fair value" of Smoak's stock at approximately $4 million. Smoak presented only this "fair value" appraisal to Quick as its appraisal under the stock option agreement and concealed the prior, much lower appraisals.

Following a bench trial, the district court determined that the stock option agreement unambiguously required the use of "fair market value" appraisals and that there was no basis to reform the agreement to use "fair value" appraisals. The district court also concluded that Smoak breached the stock option agreement and acted in bad faith by filing the first action rather than jointly appointing a third appraiser. In particular, the district court found that Smoak "hid [the prior, much lower] appraisals during the extremely contentious discovery process" and that the "actions of Smoak's representatives more than hint at impropriety." J.A. 59. Based on these findings, the district court declared that Quick's $1.1 million appraisal was the only valid appraisal and the proper value for Quick to pay for Smoak's stock.

As for Quick's claim for damages for "lost management time," the district court granted judgment in favor of Smoak because Quick failed to produce sufficient evidence to measure these damages. The district court also denied Quick's claim for attorneys' fees because the provision in the stock option agreement providing for attorneys' fees to Quick had expired. Last, the district court denied, without explanation, Quick's claim for litigation expenses against Wuerker under 28 U.S.C. § 1927.

Four months after the district court entered final judgment in the first action, Quick filed this second action. Quick generally alleges that the defendants conspired to conceal the initial, lower appraisals and to bring the first action in bad-faith to defraud Quick into paying a much higher price for Smoak's stock. In Count I, Quick alleges that defendants Wuerker, Cornelius, Kennedy, and TGA tortiously interfered with the contractual relationship between Smoak and Quick by inducing Smoak to breach the stock option agreement. Quick primarily seeks to recover the attorneys' fees and the lost management time it was required to expend in the first action. In Count II, Quick asserts that Smoak conspired with his codefendants to breach the stock option agreement. In addition to the damages in Count I, Quick also seeks an award of punitive damages under Count II. Count III is a Virginia statutory claim alleging that the defendants conspired to maliciously injure Quick in its reputation or business and seeking to recover treble damages and attorneys' fees.

The defendants moved to dismiss the second action based on res judicata. In response, Quick argued that neither the Virginia nor federal law of res judicata barred it from bringing its claims in the second action. Basing its decision on the federal law of res judicata, the district court granted the defendants' motion to dismiss. In its ruling from the bench, the district court stated: "I think the record is clear that there was a common core of operative facts that were fully litigated in that first case that [Quick] is trying to essentially relitigate in this case." J.A....