Reeder v. Succession of Palmer

• Decision Date: 03 September 1993
• Docket Number: 92-C-3002,Nos. 92-C-2965,s. 92-C-2965
• Parties: O. William REEDER v. The SUCCESSION OF Michael B. PALMER, Lynn Paul Martin, Individually and d/b/a LPM Enterprises and Bank of LaPlace.
• Court: Louisiana Supreme Court

Page 1268

623 So.2d 1268

O. William REEDER v. The SUCCESSION OF Michael B. PALMER, Lynn Paul Martin,

Individually and d/b/a LPM Enterprises and Bank of LaPlace.

Nos. 92-C-2965, 92-C-3002.

Supreme Court of Louisiana.

Sept. 3, 1993.

Rehearing Denied Oct. 7, 1993.

Ellis B. Murov, Robert E. Kerrigan, John F. Willis, Deutsch, Kerrigan & Stiles, New Orleans, for applicant.

Stephen W. Rider, McGlinchey, Stafford, Cellini & Lang, New Orleans, Joseph Accardo, Jr., Bruce A. North, Lynn P. Martin, Accardo, Edrington & Golden, La Place, for respondent.

DENNIS, Justice. ^*

The question before us is whether this state court action is barred by res judicata because of a prior federal court judgment in the defendants' favor in a suit based on the same factual transaction or wrong as the instant case. Reeder sued for damages in federal court under federal securities statutes as the result of an alleged Ponzi or pyramid scheme perpetrated by Martin, Palmer, and others, and included a pendent state securities law claim (Reeder I ). The federal district court dismissed Reeder's case with prejudice for failure to state a claim on the ground that post-dated checks, issued to Reeder in return for his investments in a bogus air travel business, did not qualify as "securities" or "investment contracts" under federal or Louisiana securities law. Reeder v. Succession of Palmer, 736 F.Supp. 128 (E.D.La.1990). The federal court of appeal affirmed without opinion. Reeder v. Succession of Palmer, 917 F.2d 560 (5th Cir.1990).

Reeder then sued Martin and Palmer in a virtually identical action in state court, with the exceptions that his petition did not rely on federal statutes and included not only state securities claims, but also state contract, tort and unfair trade practices claims. (Reeder II ). The state trial court sustained the defendants' exceptions of res judicata and no cause of action, and dismissed Reeder's case with prejudice. The state court of appeal affirmed in part and reversed in part, holding that the federal court's dismissal of the state securities law claim operated as an adjudication on the merits for res judicata purposes, that the state tort claims had prescribed, that the state unfair trade practices claim was perempted, but that, although Reeder failed to state a cause of action in contract, his state law claim on this ground was not barred by res judicata and, therefore, he would be allowed an opportunity to amend his petition to remedy this deficiency. Reeder v. Succession of Palmer, 604 So.2d 1070 (La.App. 5th Cir.1992).

We reverse the court of appeal judgment in part and reinstate the trial court's judgment dismissing Reeder's state case with prejudice. The federal court had pendent jurisdiction over all of Reeder's state law claims because they arose out of the same transaction or wrong as those presented in the federal proceeding. Therefore, Reeder was obligated to file in his first suit all the legal theories he wished to assert. The res judicata effect of the federal court judgment precludes the omitted state law claims because it is not clear that the federal district court would have declined to exercise pendent jurisdiction over them.

1. BACKGROUND

Dr. O. William Reeder filed a complaint in federal court alleging that Lynn Paul Martin, the late Michael B. Palmer, and others had defrauded him in violation of federal and Louisiana securities laws by operating an alleged Ponzi or pyramid scheme. (hereinafter Reeder I ). Reeder's complaint specifically requested that the federal district court exercise pendent jurisdiction over plaintiff's factually-related state securities law claim filed in the federal proceeding.

According to Reeder's complaint, Palmer initially persuaded him in October of 1986 to invest in Martin's "travel club" and thereafter acted as intermediary between him and Martin. Palmer and Martin allegedly solicited funds from individuals to purchase blocks of advance airline tickets for groups taking gambling trips to Las Vegas casinos, for which the casinos were to reimburse Martin and pay a commission. Martin purportedly promised to return all of the funds invested plus interest at the rate of 6% per month on the total invested. In reality, the "travel club" never engaged in legitimate business, and when the club repaid capital contributions and so-called dividends, the money was covertly taken from capital invested by other victims of the scheme. Reeder alleged that with each investment he received two post-dated checks drawn on Martin's account with the Bank of LaPlace; one check represented a return of principal, and the other represented a fixed interest payment. Reeder's complaint stated that over the course of one and one-half years, he invested approximately $245,000 in Martin's "travel club" and received only $68,000 in return, for a net loss of $185,000.

In April of 1988, Martin turned himself in to federal authorities and confessed to having operated a Ponzi scheme in violation of federal securities laws. Martin was indicted and pleaded guilty to federal criminal charges in connection with that scheme. See United States v. Lynn Paul Martin, No. 89-390 "C"(2) (E.D.La.). Because Palmer committed suicide in May of 1988, his succession was named as a defendant in Reeder I.

In Reeder I, the federal district court concluded that no "securities" as defined under the federal or state securities laws were involved in Martin's "travel club" scheme and dismissed Reeder's case with prejudice. Reeder v. Succession of Palmer, 736 F.Supp. 128 (E.D.La.1990). The federal appellate court affirmed. Reeder v. Succession of Palmer, 917 F.2d 560 (5th Cir.1990). Reeder then activated a previously-filed state court suit against Martin and Palmer based on a petition virtually identical to his federal court action (Reeder II ). Reeder sought damages based on factual allegations substantially the same as those in his federal complaint but grounded his suit in state securities law and other state law theories, rather than on federal statutes. The state trial court sustained the defendants' exceptions of res judicata and no cause of action, and dismissed Reeder II with prejudice. The state court of appeal agreed that res judicata barred the state securities law claim, disposed of other claims on different grounds, but held that the contract claim was not barred by the federal court judgment. Reeder v. Succession of Palmer, 604 So.2d 1070 (La.App. 5th Cir.1990). We granted certiorari to determine whether the court of appeal correctly applied the principles of res judicata.

2. LAW AND ANALYSIS

When a state court is required to determine the preclusive effects of a judgment rendered by a federal court exercising federal question jurisdiction, it is the federal law of res judicata that must be applied. McNeal v. Paine, Webber, Jackson & Curtis, 249 Ga. 662, 293 S.E.2d 331 (1982); Anderson v. Phoenix Inv. Counsel of Boston, 387 Mass. 444, 440 N.E.2d 1164 (1982); Rennie v. Freeway Transport, 294 Or. 319, 656 P.2d 919 (1982); Jeanes v. Henderson, 688 S.W.2d 100 (Tex.1985), reh'g of cause overruled (May 1, 1985); Commercial Box & Lumber Co. v. Uniroyal, Inc., 623 F.2d 371, 373 (5th Cir.1980); Aerojet-General Corp. v. Askew, 511 F.2d 710 (5th Cir.), appeal dismissed and cert. denied, 423 U.S. 908, 96 S.Ct. 210, 46 L.Ed.2d 137 (1975); Restatement (Second) of Judgments Sec. 87 (1982); C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure, Jurisdiction Sec. 4468 (1981). Cf. Pilie & Pilie v. Metz, 547 So.2d 1305 (La.1989). Federal res judicata principles have been heavily influenced by the great advances in the Restatement Second of Judgments. Federal courts and commentators often cite and rarely depart from the Restatement view. 18 Wright, Miller & Cooper, Federal Practice and Procedure Sec. 4401 (1981).

Under federal precepts, "claim preclusion" or "true res judicata" treats a judgment, once rendered, as the full measure of relief to be accorded between the same parties on the same "claim" or "cause of action." When the plaintiff obtains a judgment in his favor, his claim "merges" in the judgment; he may seek no further relief on that claim in a separate action. Conversely, when a judgment is rendered for a defendant, the plaintiff's claim is extinguished; the judgment then acts as a "bar." Under these rules of claim preclusion, the effect of a judgment extends to the litigation of all issues relevant to the same claim between the same parties, whether or not raised at trial. The aim of claim preclusion is thus to avoid multiple suits on identical entitlements or obligations between the same parties, accompanied, as they would be, by the redetermination of identical issues of duty and breach. Kaspar Wire Works, Inc. v. Leco Engineering & Mach., 575 F.2d 530 (5th Cir.1978) (Rubin, J., citing authorities). See Restatement (Second) of Judgments Secs. 18-20 (1982).

Claim preclusion will therefore apply to bar a subsequent action on res judicata principles where parties or their privies have previously litigated the same claim to a valid final judgment. In most cases, the key question to be answered in adjudging the propriety of a claim preclusion defense is whether in fact the claim in the second action is "the same as," or "identical to," one upon which the parties have previously proceeded to judgment. The authorities do not provide a uniform definition of the terms "claim" or "cause of action" in connection with the application of res judicata. The clear trend, however, in the most recent decisions, in harmony with such procedural concepts as the "transaction or occurrence" test for compulsory counterclaims as stated in Federal Rules of Civil Procedure, Rule 13(a) and the "common nucleus of operative fact" standard for pendent federal jurisdiction of United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), has been towards the adoption of Sec. 24 of the...