Rachal v. Hill

• Decision Date: 03 December 1970
• Docket Number: No. 29585.,29585.
• Citation: 435 F.2d 59
• Parties: Hal Francis RACHAL and Edward B. Hunnicutt, Defendants-Appellants, v. Grover C. HILL, et ux., on behalf of themselves and all stockholders of Mooney Corporation and Mooney Aircraft, Inc., and Grover C. Hill, et ux., derivatively on behalf of Mooney Corporation and Mooney Aircraft, Inc., Plaintiffs-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

435 F.2d 59 (1970)

Hal Francis RACHAL and Edward B. Hunnicutt, Defendants-Appellants, v. Grover C. HILL, et ux., on behalf of themselves and all stockholders of Mooney Corporation and Mooney Aircraft, Inc., and Grover C. Hill, et ux., derivatively on behalf of Mooney Corporation and Mooney Aircraft, Inc., Plaintiffs-Appellees.

No. 29585.

United States Court of Appeals, Fifth Circuit.

December 3, 1970.

Hal Rachal, Midland, Tex., for defendants-appellants.

Otto B. Mullinax, Mullinax, Wells, Mauzy & Collins, Alvin A. Ohm, Dallas, Tex., Maury Maverick, Jr., San Antonio, Tex., for plaintiffs-appellees.

Before GEWIN, MORGAN and ADAMS,^* Circuit Judges.

MORGAN, Circuit Judge:

This is an appeal from an order of the District Court for the Western District of Texas granting summary judgment in favor of appellee Hill in an action brought by Hill in behalf of himself and his wife, individually, and as a representative of all the stockholders in Mooney Corporation and Mooney Aircraft, Inc., and, derivatively, in behalf of the two corporations, against appellants Hal Francis Rachal, the Chairman of the Board and President of both corporations, and Edward B. Hunnicutt, their Secretary-Treasurer, to recover damages sustained as a result of violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 CFR 240.10b-5, promulgated thereunder, and Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e.

The complaint alleges that the appellants Rachal and Hunnicutt engaged in a manipulative scheme whereby, inter alia, they "arbitrarily set the price for the common capital stock of the * * * corporations at a constantly increasing, artificially inflated value without consideration for the financial conditions of * * * the corporations and other factors affecting the aforesaid securities"; "caused the * * * corporations to place a restrictive legend on the stock certificates to enable them to manipulate the market price for securities owned by them in the corporations and to give them, as controlling persons, the opportunity to remove their personal money from the said corporations at various times when they knew cash was available in the corporate treasuries"; and then resold common stock to the corporations for the artificially established price. Further, the complaint alleges that the appellants willfully failed to disclose material facts with regard to this arrangement and the true financial position of the corporations in connection with the stock purchase made by Hill and the other purchasers of the class he seeks to represent, in violation of Section 10(b) and Rule 10b-5. Finally, the complaint alleges that the appellants willfully failed to file a statement registering the issuance of the common stock sold to Hill and the other purchasers with the Securities and Exchange Commission as required by Section 5 of the Securities Act of 1933, supra.

Prior to the filing of this action, the Securities and Exchange Commission filed a complaint against Mooney Aircraft, Inc., and Mooney Corporation and the appellants, alleging that the same manipulative scheme described above and other related conduct complained of in the instant case was violative of Sections 5 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77e and 77q(a), Section 10(b) of the Securities Exchange Act of 1934, supra, and Rule 10b-5 thereunder, supra, and sought to enjoin its continuance.¹ A final judgment of permanent injunction was entered by consent against the corporations on January 20, 1969. Rachal and Hunnicutt demanded and received a trial on the issues, after which the district court, sitting without a jury, entered an order of permanent injunction, on March 27, 1969, predicated on a finding "that Hal Francis Rachal and Edward B. Hunnicutt have engaged in acts and practices which constitute and will constitute violations of Sections 5 and 17(a) of the Securities Act of 1933, as amended (15 U.S.C. 77e and 77q(a)), and of Section 10(b) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78j(b)), and Rule 10b-5 promulgated thereunder (17 C.F. R. 240.15b-5) sic. * * *".

In its Findings of Fact and Conclusions of Law entered in conjunction with the order granting summary judgment, the district court found that the issues of fact presented by the S.E.C. complaint with respect to violations of the security laws of the United States and the fact issues presented by the complaint in the instant action are identical; that the appellants had a full and fair trial, with full opportunity to present their defenses, on the identical issues in the prior S.E.C. injunction action; and that the appellants presented no new, other or different evidence than was presented by them in the prior S.E.C. action and failed to indicate that any such evidence exists which could not have been produced in the former trial. On this basis, the district court held as a matter of law that the appellants were collaterally estopped to deny that their conduct violated the security laws of the United States and that the appellees were entitled to summary judgment on the issue of liability. The district court also granted summary judgment on the other issues presented, awarding $1,285.30 to appellant Hill, that amount being the purchase price of the shares of stock acquired by Hill; dismissing the class action for failure to present common questions of fact; and awarding Mooney Aircraft, Inc., and Mooney Corporation $454,000.00 from appellant Rachal, representing the amount he and members of his family received from the resale of stock to the corporations, and $5,960.00 from appellant Hunnicutt, representing what he received from the resale of stock to the corporations.

The principal issue presented by this appeal is whether the district court was correct in holding that the finding that the appellants had violated the security laws of the United States in the S.E. C. injunction action precluded the relitigation of that issue in the present case under the doctrine of collateral estoppel. The appellants contend that since Hill, the plaintiff below, was a stranger to the S.E.C. injunction action, he cannot assert the adverse determination of liability issue in that action against the appellants in the present action in the face of the requirement that collateral estoppel be mutual. Secondly, they contend that the doctrine of collateral estoppel may not be invoked to deprive them of a trial by jury on the issue of their civil liability.

Although many states still honor the rule of mutuality of estoppel,² the modern trend has been to discard the rule and preclude a party from relitigating an issue decided against him in a prior action, even if the party asserting the estoppel was a stranger to the prior action. See DeWitt v. Hall, 19 N.Y.2d 141, 278 N.Y.S.2d 596, 225 N.E.2d 195, 31 A.L.R.3d 1035 (1967).³ The federal rule comports with the modern trend and thus it is clear that the requirements of mutuality need not be met for collateral estoppel to be applied in an action presenting a federal question in the courts of the United States. Bruszewski v. United States, 3 Cir., 1950, 181 F.2d 419, cert. den. 340 U.S. 865, 71 S.Ct. 87, 95 L.Ed. 632; United States v. United Air Lines, Inc., D.Nev., 1962, 216 F.Supp. 709, aff'd. sub nom., United Air Lines, Inc. v. Wiener, 9 Cir., 1964, 335 F.2d 379, 404-405, (adopting dist. court opinion as to collateral estoppel) cert. den. 379 U.S. 951, 85 S.Ct. 452, 13 L.Ed.2d 549. Although this circuit has never before been asked to abandon the requirement of mutuality of estoppel as a matter of federal law, we have followed the trend in the recent Texas diversity case of Seguros Tepeyac, S. A., Compania Mexicana v. Jernigan, 5 Cir., 1969, 410 F.2d 718, cert. den. 396 U.S. 905, 90 S. Ct. 219, 24 L.Ed.2d 181.

This is not to say, however, that a party who receives an adverse determination of an issue in prior litigation will be forever estopped from relitigating that issue under all circumstances. While the requirement of mutuality need no longer be met, the doctrine of collateral estoppel will not be applied unless it appears that the party against whom the estoppel is asserted had a full and fair opportunity to litigate the issue in the prior proceeding and that application of the doctrine will not result in an injustice to the party against whom it is asserted under the particular circumstances of the case. See United States v. Webber, 3 Cir., 1968, 396 F.2d 381, 389; Graves v. Associated Transport, Inc., 4 Cir., 1965, 344 F.2d 894 (Virginia law). As Judge Hastie of the Third Circuit stated in the leading federal case of Bruszewski v. United States, supra, 181 F.2d at 421:

* * * a party who has had one fair and full opportunity to prove a claim and has failed in that effort, should not be permitted to go to trial on the merits of that claim a second time. Both orderliness and reasonable time saving in judicial administration require that this be so unless some overriding consideration of fairness to a litigant dictates a different result in the circumstances of a particular case. (Emphasis supplied.)

Although there are serious doubts as to the appropriateness of allowing a judgment in injunctive proceedings brought by the federal government to prevent future violations of the security laws to become res judicata as to the liability of the same defendant in a civil action for damages resulting from past violations, when asserted by a private party who was a stranger to the prior action, cf. Sam Fox Publishing Co. v. United States, 366 U.S. 683, 81 S.Ct. 1309, 6 L.Ed.2d 604 (1961), we do not rest our decision on these grounds.

It is clear that had it not been for the prior adverse determination of the issue of liability by the district court sitting without a jury in the S.E.C. injunction proceeding, the appellants would have been, without question, entitled to a trial by jury as a matter of right...