Valley Nat. Bank of Arizona v. AE Rouse & Co.

• Decision Date: 11 August 1997
• Docket Number: No. 96-15993.,96-15993.
• Citation: 121 F.3d 1332
• Parties: VALLEY NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-counter-defendant-Appellant, v. A.E. ROUSE & COMPANY, a Wyoming general partnership; B.M. Rouse & Company, a Wyoming general partnership; A.E. Rouse, husband; Betty M. Rouse, wife, Defendants-counter-claimants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

121 F.3d 1332

VALLEY NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-counter-defendant-Appellant, v. A.E. ROUSE & COMPANY, a Wyoming general partnership; B.M. Rouse & Company, a Wyoming general partnership; A.E. Rouse, husband; Betty M. Rouse, wife, Defendants-counter-claimants-Appellees.

No. 96-15993.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 14, 1997.

Decided August 11, 1997.

COPYRIGHT MATERIAL OMITTED

Mark I. Harrison, Bryan Cave, Phoenix, AZ, for plaintiff-appellant.

Amy Schwartz, Byrne, Beaugureau, Shaw, Zukowski & Hancock, Phoenix, AZ, and Richard Q. Nye, Richard Q. Nye, Ltd., Phoenix, AZ, for defendants-appellees.

Before: FARRIS and TASHIMA, Circuit Judges, and STAGG, Senior District Judge.^*

FARRIS, Circuit Judge:

The Valley National Bank of Arizona obtained a default judgment in Arizona state court against the Varga Group, an Arizona general partnership. The Bank brought this suit to enforce its judgment against two general partners in the Varga Group, A.E. Rouse & Company and B.M. Rouse & Company, both Wyoming partnerships, and those partnerships' general partners. The district court granted summary judgment in favor of the defendants. The Bank appeals. We have jurisdiction under 28 U.S.C. § 1291. We affirm.

I. BACKGROUND

In 1985, the Varga Group, an Arizona general partnership comprised of Charles P. Varga, Schwan Properties, A.E. Rouse & Company and B.M. Rouse & Company, approached Valley National Bank to obtain financing for a real estate purchase. The Bank loaned the Varga Group 11.5 million dollars. The loan was secured by a deed of trust, and Charles Varga, A.E. Rouse, B.M. Rouse, Joseph Schwan and Catherine Schwan each personally guaranteed the loan.

In 1987, the Varga Group and the guarantors defaulted on the loan. The Bank sued the Group and the guarantors to foreclose the deed of trust and for the remaining deficiency. The complaint did not name A.E. Rouse & Company or B.M. Rouse & Company as defendants and neither was served. The Varga Group and the guarantors answered and counterclaimed, arguing that the loan was not a loan, but a joint venture disguised as a loan to evade federal banking laws prohibiting the Bank from entering into joint ventures.

Prior to trial, the Varga Group filed for Chapter 11 bankruptcy. The Bank successfully moved to have the stay lifted, and foreclosed on its deed of trust. The Varga Group's bankruptcy proceeding was thereafter dismissed, and the Bank's suit against the Group was returned to the state trial court for adjudication.

The Rouses appeared at the trial individually, but no appearance was made on behalf of the Varga Group. Over the Rouses' objection, the trial judge entered default against the Group for failure to appear.

The case was tried to a jury, which found that the relationship between the Bank and the guarantors was a joint venture, not a loan, and that the Bank had breached the agreement. The jury awarded the Rouses and the Schwans $300,000 in damages for the breach.¹

Notwithstanding the jury finding that the transaction at issue was a joint venture, the trial court held a default hearing and entered judgment against the Varga Group for $12,946,415.10. There was no appeal from this judgment.

The Bank, however, appealed from the jury verdict. The Arizona Court of Appeals upheld the jury's finding that the relationship between the Varga Group and the Bank was a joint venture. Bank One, Arizona v. Rouse, 181 Ariz. 36, 887 P.2d 566, 569-70 (1994). The court refused, however, to enforce such an illegal agreement, and therefore vacated the damages awarded the Rouses and Schwans, and reversed the negligent misrepresentation verdict. Id. at 570-71.

Meanwhile, the Bank filed the present action in Arizona federal district court, seeking to enforce the default judgment against the Rouse partnerships and the Rouses individually. The Rouses returned to the state court, and on behalf of the Varga Group, moved to set aside the default judgment. The motion was denied, and the denial was affirmed on appeal. The parties then filed cross motions for summary judgment in the district court action.

The district court granted the Rouses' motion and denied the Bank's. The court refused to enforce the default judgment on public policy grounds, explaining that the court would not "permit a party who has engaged in an unlawful act, i.e., a bank acting as a joint venturer, to benefit from its wrongful agreement." Alternatively, the court held that the default judgment was not binding on the Rouse Partnerships because they had been neither served nor named in the underlying suit. Because the statute of limitations had run on an action against the Rouse Partnerships on the original debt, the district court reasoned, the Rouse Partnerships (and thus the Rouses) were entitled to summary judgment. The Bank appeals.

II. STANDARD OF REVIEW

We review the district court's grant of summary judgment de novo. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996). Viewing the evidence in the light most favorable to the nonmoving party, we must determine whether there are any genuine issues of material fact and whether the district court correctly applied the substantive law. Id.

III. DISCUSSION

A.

The Full Faith and Credit Act requires federal courts to give state court judgments the same effect they would have in the state in which they were entered. 28 U.S.C. § 1738. A federal court may not refuse to enforce a valid state judgment on the ground that enforcement would violate some unarticulated federal public policy. Section 1738 "does not allow federal courts to employ their own rules ... in determining the effect of state judgments." Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331, 84 L.Ed.2d 274 (1985)(quoting Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 1896-97, 72 L.Ed.2d 262 (1982)). "Absent a partial repeal of the Act ... by another federal statute, a federal court must give a state judgment the same effect that it would have in the courts of the State in which it was rendered." Matsushita Elec. Indus. Co., Ltd. v. Epstein, ___ U.S. ___, ___, 116 S.Ct. 873, 876, 134 L.Ed.2d 6 (1996)(emphasis added). To the extent the district court refused to enforce the Arizona default judgment because it was against federal public policy to enforce a judgment predicated on an illegal contract, the district court erred.

This holds true despite the fact that the default judgment was inconsistent with the previously entered jury verdict. When a court is faced with inconsistent judgments, "it should give res judicata effect to the last previous judgment entered." Robi v. Five Platters, Inc., 838 F.2d 318, 328 (9th Cir.1988)(quoting Americana Fabrics, Inc. v. L & L Textiles, Inc., 754 F.2d 1524, 1530 (9th Cir.1985)(emphasis in original)); see Casillas v. Arizona Dep't of Economic Security, 153 Ariz. 579, 739 P.2d 800, 802 (App.1986)(applying "last in time" rule as Arizona law). "The formal rationale behind this rule is that the implicit or explicit decision of the second court to the effect that the first court's judgment is not res judicata, is itself res judicata and therefore binding on the third court. The decision is not binding because it is correct; it is binding because it is last." Americana Fabrics, 754 F.2d at 1530. "If an aggrieved party believes that the second court erred in not giving res judicata effect to the first court's judgment, then the proper redress is appeal of the second court's judgment, not collateral attack in a third court." Id. (citations omitted).

The Rouses argue that the last in time rule only applies where two different courts enter inconsistent judgments in two separate actions, not where, as here, the two inconsistent judgments are entered by the same court in the same action. The Rouses offer no authority supporting their position, which we reject. The rationale behind the rule applies equally where the second judgment is entered by the same court that entered the first; the second judgment contains an implicit decision that the first judgment is not res judicata which is itself res judicata, binding on a subsequent court.

Assuming the state trial court erred in not giving the Group the benefit of the jury verdict, that error formed the basis for a direct appeal, not a collateral attack. Erroneous or not, the default judgment was a valid, final judgment of a court of competent jurisdiction. It controlled over the previously entered jury verdict. The district court was obligated to enforce it.

To say that the district court was required to enforce the judgment, however, answers only half of the question. The remaining half is whether the default judgment is binding on the Rouse Partnerships, which were neither named nor served in the underlying lawsuit. The district court answered this question of Arizona partnership law in the negative.

B.

In Arizona, partners are "liable jointly and severally for all partnership debts." Ariz.Rev.Stat. § 29-215. Because partners are jointly and severally liable, they may be sued in successive actions for the same claim. Faber v. Althoff, 168 Ariz. 213, 812 P.2d 1031, 1038 (App.1990).

But that does not mean that a judgment against the partnership, or against an individual partner, may be enforced against partners who were not parties to an action. At the time the default judgment was entered, Ariz.Rev.Stat. § 29-104 provided in full:

In actions against partners, the summons and complaint may be served upon one partner, and such service shall authorize a judgment against the partnership and against the partner actually served.

Ariz.Rev.Stat. § 29-104 (West 1989).² As the language of the statute makes clear, in an action against a partnership, judgment is not authorized against unserved partners. This comports with two general common law principles: (1) that a partnership...