Velasquez v. Franz

• Decision Date: 25 April 1991
• Citation: 123 N.J. 498,589 A.2d 143
• Parties: Jose VELASQUEZ, Plaintiff-Appellant, v. Vera FRANZ, individually and as Trustee of Leyden Hydraulics, Inc.; and Leyden Hydraulics, Inc., Defendants-Respondents, and Cridge, Inc., and New Jersey Manufacturers Insurance Company, Defendants.
• Court: New Jersey Supreme Court

Page 498

123 N.J. 498

589 A.2d 143

Jose VELASQUEZ, Plaintiff-Appellant, v. Vera FRANZ, individually and as Trustee of Leyden

Hydraulics, Inc.; and Leyden Hydraulics, Inc.,

Defendants-Respondents,

and

Cridge, Inc., and New Jersey Manufacturers Insurance

Company, Defendants.

Supreme Court of New Jersey.

Argued Nov. 26, 1990.

Decided April 25, 1991.

Waldron Kraemer, for plaintiff-appellant (Kasen, Kraemer, Burns & Lovell, attorneys) Springfield.

Stephen O. Mortenson, for defendants-respondents (Mortenson and Pomeroy, attorneys) Cranford.

The opinion of the Court was delivered by

GARIBALDI, J.

This case presents the question of whether a dismissal in federal court that focuses on a defendant's lack of capacity to be sued constitutes an adjudication on the merits of the claim, thereby barring under principles of res judicata a subsequent suit between the same parties, asserting the same claims, based on the same facts in state court. Indeed, the complaint plaintiff filed in the subsequent state action was virtually identical to the complaint plaintiff filed in the prior federal action.

I

Plaintiff, Jose Velasquez, a New York resident, was employed as a machine operator at Certech, Inc., in Westwood, New Jersey. On November 6, 1984, Velasquez lost most of his right hand while he was operating a molding machine that recycled unexpectedly while his hand was inside, allegedly as a result of defective controls.

Defendant Leyden Hydraulics, Inc. ("Leyden"), an Illinois corporation, manufactured the machine. Leyden had been dissolved under Illinois law on October 25, 1984, just thirteen days before the accident. In liquidation, Leyden's assets were distributed to defendant Vera Franz, the wife of Leyden's principal shareholder. Franz was an Illinois resident.

Velasquez commenced suit in the United States District Court for the District of New Jersey on June 20, 1986, against Leyden and against Franz, individually and as trustee of Leyden. Velasquez alleged, among other claims, that the machine manufactured by Leyden was defective and that Franz, as recipient of the corporate assets, was derivatively liable for any claims. He premised the action on diversity jurisdiction, pursuant to 28 U.S.C. § 1332. He also sued Cridge, Inc., the manufacturer of the machine die, and New Jersey Manufacturers Insurance Company, for having negligently inspected the machine. Those claims are not at issue.

Leyden moved to dismiss plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for "failure to state a claim upon which relief can be granted." Specifically, the corporation argued it lacked the capacity to be sued. Leyden maintained that the Illinois Business Corporations Act of 1983, Chapter 32, paragraph 12.80, which bars claims against a corporation accruing subsequent to corporate dissolution, governed plaintiff's suit. Franz joined Leyden's motion to dismiss, asserting that because the corporation could not lawfully be sued, she, as a former shareholder, also lacked the capacity to be sued.

On March 23, 1987, the federal district court dismissed Leyden and Franz from the action. Acknowledging the parties' disagreement on the law that governed their dispute, the court requested that the parties brief the issue, which they did.

In its opinion, the federal district court recognized that

in considering a Rule 12(b)(6) motion to dismiss, I must accept as true the factual allegations of the complaint and I may only dismiss the complaint if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 [78 S.Ct. 99, 101-102, 2 L.Ed.2d 80] (1957); Cruz v. Beto, 405 U.S. 319 [92 S.Ct. 1079, 31 L.Ed.2d 263] (1972).

With this standard in mind, I turn to the relevant allegations of the complaint.

After the court set forth the relevant facts, it turned to a discussion of which law governed Leyden's capacity to be sued. Relying primarily on Federal Rule of Civil Procedure 17(b), which instructs that "[t]he capacity of a corporation to sue and be sued shall be determined by the law under which it is organized," and recognizing that Leyden was an Illinois corporation, the federal district court found that Illinois law governed Leyden's capacity to be sued. The federal district court then analyzed the Illinois Business Corporations Act of 1983, supra, paragraph 12.80, and concluded that

[c]onsistent with its plain language, the [Illinois statute], this section and its predecessor section have been uniformly interpreted to permit the survival of, for the specified period, those causes of action which accrued prior to the dissolution of the corporation. For example, in Blankenship v. Demmler Mfg. Co., 89 Ill.App.3d 569 , 411 N.E.2d 1153 (1st Dist.1980), the plaintiff in a personal injury action appealed the trial court's dismissal of defendant Demmler Mfg. and its former president.

In affirming the dismissals, the Illinois Appellate Court found that the legislative intent in passing Paragraph 12.80 predecessor was to abrogate the common law doctrine that provided that once a corporation was dissolved, the corporation could neither sue or be sued and all pending proceedings abated.

[89 Ill.App.3d at 573, 44 Ill.Dec. at 790, 411 N.E.2d at 1156.]

The federal district court then analyzed other Illinois cases that had construed the Illinois corporate law. Based on its analysis of Illinois statutory and case law, the federal district court concluded that claims cannot accrue against an Illinois corporation subsequent to its dissolution and dismissed the case against Leyden.

The federal district court also dismissed the complaint against Franz. It explicitly declined to decide plaintiff's contention that Illinois courts would impose liability on former shareholders under a trust-fund doctrine. That doctrine renders shareholders who receive distributed assets of the corporation liable as "trustees" for claims of the corporation's creditors. See Blankenship v. Demmler Mfg. Co., supra, 89 Ill.App.3d at 572, 44 Ill.Dec. at 789, 411 N.E.2d at 1155. Instead, the federal district court relied on the reasoning of the Blankenship court that if the Illinois survival statute barred an action against a corporation for late accrual of the cause of action, the trust-fund doctrine could not reasonably be found to hold an individual shareholder liable. Id. at 573-74, 44 Ill.Dec. at 790-91, 411 N.E.2d at 1156-57. The court found that "even assuming arguendo that the doctrine does apply, Franz may still not be held liable, because such liability would be inconsistent with Illinois law providing for the end of a corporate existence." See id. at 572, 44 Ill.Dec. at 790, 411 N.E.2d at 1156. The federal district court quoted the Blankenship court's analysis that to allow a plaintiff to recover on such a theory "would mean that the corporation could never completely dissolve but would live on indefinitely through its shareholders." Ibid.

The federal district court did not reach Franz's remaining argument that plaintiff could not properly pierce the corporate veil to hold Franz liable. Apart from the question of whether adequate factual justification existed to disregard the corporate form, the court found that the Illinois corporate dissolution statute precluded plaintiff's claim because the cause of action had arisen after Leyden's dissolution. Consequently, the federal district court granted the motion of defendants Leyden and Franz for dismissal of the claims against them.

Velasquez did not appeal the federal district court decision. Instead, four days later, on March 27, 1987, he filed a complaint virtually identical to his federal complaint in the New Jersey Superior Court, Law Division. That complaint differed only by a modification of the ad damnum clause and the caption style required for state court filings. Defendants Leyden and Franz moved to dismiss the complaint, raising the same "capacity to be sued" arguments that they had raised in federal court. In addition, they argued that the doctrine of res judicata barred the complaint.

The New Jersey trial court dismissed the complaint against Leyden and Franz not on the basis of res judicata but because it construed New Jersey law to dictate that the law of the incorporating state governs the question of a corporation's capacity to be sued, relying on Harris-Woodbury Lumber Co. v. Coffin, 179 F. 257 (C.C.N.C.1910) aff'd, 187 F. 1005 (C.C.A.N.C.1911). Following the federal district court's analysis, the trial court then concluded that Illinois law barred suit against the dissolved corporation and its former shareholder. Plaintiff therefore sought and was granted leave to appeal to the Appellate Division.

The Appellate Division affirmed the trial court's dismissals but based its decision on principles of res judicata rather than on the trial court's rationale. After examining federal rules on res judicata it found that the federal judgment was an "adjudication on the merits" that barred relitigation of the claims in state court. In accordance with Federal Rule of Civil Procedure 41(b), the Appellate Division found that a dismissal pursuant to a motion under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim on which relief could be granted constitutes an adjudication on the merits. The Appellate Division disagreed with plaintiff's contention that the dismissal for failure to state a claim in this case resembled a dismissal for lack of jurisdiction. Because it concluded that the case in state court was barred by res judicata, the Appellate Division did not reach the issues of choice of law or former-shareholder liability.

We granted plaintiff's motion for leave to appeal from an interlocutory order of the Appellate Division affirming the dismissal of his complaint against Leyden and Franz, 122 N.J. 343, 585 A.2d 357 (1990), and now affirm the Appellate...