Argued September 5, 1979
Decided October 16, 1979
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, ANTHONY J. CERRATO, J.
James D. Burchetta and Robert C. Agee for appellant.
Roger J. Hawke and Thomas J. Mullaney for respondent.
The order of the Appellate Division should be affirmed, with costs.
As that court held, plaintiff-appellant's present claim is precluded by the determination adverse to her in the Federal court action. If one accepts the contention now advanced by her that recovery on the theory of breach of common-law fiduciary duties was not pleaded in the Federal action, it could have been. On the other hand, if one accepts the analysis of the pleadings advanced by the dissenter, the common-law cause of action was separately pleaded in the Federal action. In any event it is not disputed that both the Federal statutory claim and the common-law claim arose out of the same series of connected transactions. The disposition of the Federal action on the merits for failure to state a cause of action extinguished all rights plaintiff may have had to remedies against Merrill Lynch with respect to all or any part of the series of connected transactions out of which the Federal action arose. (Matter of Reilly v Reid, 45 N.Y.2d 24; see Restatement, Judgments, 2d [Tent Draft No. 1, 1973], § 61.) This rule applies to extinguish theories of recovery not presented and remedies not demanded in the Federal action (see Restatement, Judgments, 2d [Tent Draft No. 1, 1973], § 61.1).
The only basis on which the present claim would not now be precluded would be that plaintiff-appellant's present common-law claim could not have been asserted in the Federal action. Although it is conceded that the common-law cause of action could have been considered only under the pendent jurisdiction of the Federal court and that the Federal court could have declined to exercise such jurisdiction, unless it is clear that the Federal court as a matter of discretion did decline or would have declined to exercise that jurisdiction, the State action is barred (see id., § 61.1, Comment e, and Illustration 10). In the present instance, on the record in the Federal action submitted to us it is not clear that the Federal court did decline or would have declined to exercise its pendent jurisdiction. That issue appears not to have been raised or even considered by the parties or by the court. Plaintiff-appellant made no application for any clarification or limitation with respect to the scope of the dismissal of the Federal action.
Plaintiff-appellant's original complaint, setting forth 48 counts in 103 paragraphs running to 39 pages had been dismissed with leave to file an amended complaint. Defendants-respondents moved to dismiss the amended complaint (all but 8 of the 103 paragraphs of which were taken verbatim from the original complaint) for failure to allege fraud with sufficient particularity as required by subdivision (b) of rule 9 of the Federal Rules of Civil Procedure (US Code, tit 28). The Federal court granted the motion to dismiss with the statement — "The complaint still fails to set forth the facts and circumstances of the alleged fraud and must be dismissed." This dismissal was on the merits for failure to state a cause of action.
In Federal court, as distinguished from our State courts, a dismissal is on the merits unless the contrary expressly appears (Fed Rules Civ Pro, rule 41, subd [b], US Code, tit 28). In principle, a dismissal on the merits should be accorded the same consequences for purposes of claim preclusion whether it comes after trial or before trial on a motion for summary judgment or on a motion to dismiss for failure to state a cause of action after leave to replead has been granted as in this case.
Following an affirmance of this dismissal on plaintiff-appellant's appeal to the United States Court of Appeals for the Second Circuit, leave was sought to replead again. The District Court denied this application with the observation — "Inasmuch as plaintiff fully perfected her appeal to the Court of Appeals, and since the Court of Appeals did not remand the action to this court with direction to permit plaintiff to replead, this court has no authority to allow plaintiff leave to serve and file an amended complaint." Nothing in this record supports the slightest inference that a common-law cause of action was dismissed for refusal of the Federal court to exercise its pendent jurisdiction or that the court would have declined to exercise that jurisdiction. There is thus no basis for failing to give preclusive effect to the disposition in the Federal forum, thereby barring the claim plaintiff-appellant seeks now to prosecute.
Plaintiff should not be foreclosed from asserting her State-based claim by the disposition of her action in Federal court. Plaintiff's Federal complaint alleged the Federal securities laws as the predicate for the District Court's jurisdiction and contained references to defendant's breach of common-law fiduciary duties, negligence and unprofessional conduct. The District Court, noting that plaintiff's complaint alleged violation of the antifraud provisions of the Federal statutes and generally a fraud based on breach of fiduciary duty, dismissed the complaint for failure to plead fraud with sufficient particularity as required by subdivision (b) of rule 9 of the Federal Rules of Civil Procedure. That dismissal operates as an adjudication on the merits (Fed Rules Civ Pro, rule 41, subd [b]).
Although the District Court had the power to consider theories of recovery grounded in State law under the doctrine of pendent jurisdiction, the ambiguity in the opinion and the pleadings do not permit the conclusion that the court did or would have exercised jurisdiction over any State claims that might have been asserted. Indeed, it is not at all clear whether plaintiff asserted a claim grounded in State law or whether the Federal court considered claims other than those grounded in Federal law.
Both the majority and Judge MEYER in dissent note that theories of recovery jurisdictionally assertable in a prior action are precluded in a later suit when it is clear that the court in the first action would have exercised jurisdiction as a matter of discretion (Restatement, Judgments, 2d [Tent Draft No. 5, 1978], § 61.1). There is no quarrel with this proposition. But by barring plaintiff's complaint, the majority effectively presumes that the Federal court would have exercised jurisdiction in this case. Such presumption is unwarranted where, as here, the Federal claim is dismissed on the pleadings prior to trial (see Mine Workers v Gibbs, 383 U.S. 715, 726). Indeed, the presumption is to the contrary. An exercise of pendent jurisdiction in such circumstances would be contrary to Federal practice in the Second Circuit (see, e.g., CES Pub. Corp. v St. Regis Pub., 531 F.2d 11; Kavit v Stamm Co., 491 F.2d 1176; Iroquois Inds. v Syracuse China Corp., 417 F.2d 963, cert den 399 U.S. 909; Altman v Knight, 431 F. Supp. 309; but see Gem Corrugated Box Corp. v National Kraft Container Corp., 427 F.2d 499, 501 , n 1) and possibly an abuse of discretion (see Nolan v Meyer, 520 F.2d 1276, cert den 423 U.S. 1034; Braunstein v Laventhol Horwath, 433 F. Supp. 1077). It must be assumed, therefore, that the Federal court here would have declined to exercise its jurisdiction once it dismissed the Federal claim prior to trial. The procedural ambiguities present in this case do not justify a different conclusion.
The order of the Appellate Division should be reversed, and the order of Supreme Court reinstated without prejudice to motion properly made under CPLR 3211 (subd [a], par 7).
I respectfully dissent. In my view the majority fails to follow prior res judicata rulings of this court and misconceives Federal case law and rules relating to pendent jurisdiction.
Res judicata is a policy essential to our jurisprudence both to conserve judicial resources and to prevent the harassment by one party of another that would result were there no rule proscribing relitigation of an issue once fairly decided. But we have been at pains to make clear that in applying the policy courts must take care that a party not be excluded from the day in court to which every litigant is entitled (cf. Gramatan Home Investors Corp. v Lopez, 46 N.Y.2d 481, 485). To that end we have held that a litigant who claims the benefit of a former judgment has the burden of proving that the issue which he urges is precluded was involved in the prior litigation, either by actual determination or by necessary implication (Bronxville Palmer v State of New York, 18 N.Y.2d 560; People ex rel. Village of Chateaugay v Public Serv. Comm., 255 N.Y. 232). Since the Federal court decisions in plaintiff's prior action are, as the factual analysis below demonstrates and as the majority concedes, at best equivocal with respect to the basis for dismissal of plaintiff's claim against Merrill Lynch, it was Merrill Lynch's burden, not plaintiff's, to establish that plaintiff's claim against it was dismissed on the merits. Yet the majority holds plaintiff precluded because she "made no application for any clarification or limitation with respect to the scope of the dismissal of the federal action." To require her rather than Merrill Lynch to seek such clarification is nothing less than a shifting of the burden of proof and constitutes a major departure from the policy we have heretofore uniformly followed.
If Merrill Lynch is correct that the Federal decisions dismissed plaintiff's common-law claims on the merits and not as a matter of jurisdiction, it can vindicate its position (and meet its burden of proof) by applying to the Federal court under section 2283 of title 28 of the United States Code for an order enjoining relitigation of the issue in the State court (Ennis Co. v Woodmar Realty Co., 542 F.2d 45, cert den 429 U.S. 1096; Donelon v New Orleans Term. Co., 474 F.2d 1108, cert den 414 U.S. 855; Browning Debenture Holders' Committee v Dasa Corp., 454 F. Supp. 88; Heller Co. v Cox, 379 F. Supp. 299).
An understanding of the fallacy in the majority's pendent jurisdiction reasoning requires analysis of the complaint in the Federal action and of the decisions of the Federal courts with respect to that complaint. The first three paragraphs of the complaint predicate jurisdiction of the court upon the Investment Advisors Act of 1940 and the Securities and Exchange Act of 1934 and venue upon the residence of the parties and the activities of the defendants. The complaint then pleads eight causes of action, only two of which (the third and the eighth) are against Merrill Lynch. Each of the other causes of action (except, of course, the first) opens with a paragraph repeating and realleging prior allegations of the complaint, including the jurisdictional paragraphs, and each, including the first, contains additional allegations specifically referring to the Investment Advisors Act and the Securities Act of 1934. Neither the third nor the eighth refers, expressly or by incorporation, to either of those acts. The allegations of the third and the eighth causes of action set forth the establishment of a customer-broker relationship, reliance by plaintiff upon the judgment and integrity of the Merrill Lynch officials handling her account, and that those officials in various ways acted in an unprofessional, negligent and illegal manner and in "breach of the common law standards of fiduciary responsibility".
Plaintiff's State complaint alleges only the claim made in the third cause of action of the Federal complaint. Except as referred to in the text, the eighth cause of action has no bearing on the problem presented by this appeal and, therefore, is not further discussed.
The inference to be drawn from the absence from the third cause of action of any reference to Federal statute and the inclusion of express reference to common-law standards is that plaintiff sought to allege only a common-law and not a Federal statutory cause of action. If that inference is accepted, then clearly the Federal court was without subject matter jurisdiction, for there was no predicate Federal claim against Merrill Lynch to which the common-law claim could be pendent (Hurn v Oursler, 289 U.S. 238, 245-248).
If that inference be rejected and the third cause of action be deemed to allege in the one cause of action both a Federal statutory and a State common-law claim deriving "from a common nucleus of operative fact" (Mine Workers v Gibbs, 383 U.S. 715, 725), then the Federal court's dismissal of the complaint for failure to comply with the requirement of subdivision (b) of rule 9 of the Federal Rules of Civil Procedure that "the circumstances constituting fraud * * * be stated with particularity", because it excised the predicate Federal statutory claim, likewise left the Federal court without subject matter jurisdiction of the pendent claim. That this is so is clear from the Gibbs decision as well as the Restatement Comment and Illustration upon which the majority rely.
In Gibbs the Supreme Court, after quoting from Hurn v Oursler (supra) noted (383 US, at p 724) that: "Had the Court found a jurisdictional bar to reaching the state claim in Hurn, we assume that the doctrine of res judicata would not have been applicable in any subsequent state suit. But the citation of Baltimore S.S. Co. shows that the Court found that the weighty policies of judicial economy and fairness to parties reflected in res judicata doctrine were in themselves strong counsel for the adoption of a rule which would permit federal courts to dispose of the state as well as the federal claims." It then held that there is power in the Federal courts to hear both Federal and State claims that would be expected to be tried in one judicial proceeding, but recognized (383 US, at p 726) that: "That power need not be exercised in every case in which it is found to exist. It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff's right. Its justification lies in considerations of judicial economy, convenience and fairness to litigants; if these are not present a federal court should hesitate to exercise jurisdiction over state claims, even though bound to apply state law to them, Erie R. Co. v. Tompkins, 304 U.S. 64. Needless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law. Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well." (Emphasis supplied.) Not only did it thus mandate dismissal of the State claim on jurisdictional grounds when the Federal claim is dismissed on nonjurisdictional grounds, but it noted (383 US, at p 727) that: "The question of power will ordinarily be resolved on the pleadings."
The Restatement of Judgments, 2d, correctly interprets Gibbs as not barring a second State action under the circumstances of this case, for it states in Comment e to section 61.1 (Tent Draft No. 5, p 160) that: "A given claim may find support in theories or grounds arising from both state and federal law. When the plaintiff brings an action on the claim in a court, either state or federal, in which there is no jurisdictional obstacle to his advancing both theories or grounds, but he presents only one of them, and judgment is entered with respect to it, he may not maintain a second action in which he tenders the other theory or ground. If however, the court in the first action would clearly not have had jurisdiction to entertain the omitted theory or ground (or, having jurisdiction, would clearly have declined to exercise it as a matter of discretion), then a second action in a competent court presenting the omitted theory or ground should be held not precluded." (Emphasis supplied.) Illustration 10 to which the Comment refers assumes a Federal antitrust action dismissed after trial, followed by a State antitrust action based on the same facts and concludes that because the Federal court would have had pendent jurisdiction of the State claim the State action would be barred "unless it is clear that the federal court would have declined as a matter of discretion to exercise that jurisdiction (for example, because the federal claim, though substantial, was dismissed in advance of trial)" (emphasis supplied).
Clear from the foregoing is it that dismissal of the Federal claim in advance of trial and without leave to replead, as occurred in the instant case, leaves the Federal court without subject matter jurisdiction of the State claim and bars use of the Federal dismissal as res judicata.
See, also, the Reporter's Notes (Tent Draft No. 5, p 179) which state: "If in a given case it is clear that a federal court, applying the criteria elaborated in Gibbs, would not have entertained the state theory, the state action should not be barred."
Merrill Lynch argues, however, and the majority apparently agrees, that the dismissal under subdivision (b) of rule 9 was a dismissal of both the Federal and State claims on the merits rather than as a matter of jurisdiction. Aside from the fact that dismissal by the Federal Judge was because the complaint "failed to set forth the facts and circumstances of the fraud alleged" and made no mention of the breach of fiduciary duty, negligence or illegality which was the basis for the "pendent" State claim, it is clear from Gibbs that having dismissed the Federal statutory claim the Judge was without power to consider the State claim and dismiss it on the merits. Nor does subdivision (b) of rule 41 of the Federal Rules change that result, as the majority's footnote suggests. That rule provides that unless the court in its order specifies otherwise a dismissal, "other than a dismissal for lack of jurisdiction" (emphasis supplied), operates as an adjudication upon the merits. That the Federal Judge failed to specify the ground for dismissal of the pendent State claim may have been because he overlooked it (a possibility suggested by the failure to refer to anything but "fraud") or, more likely, that he concluded that Gibbs made it sufficiently clear that his dismissal of the Federal claim left him without jurisdiction of the State claim that he did not need to state the obvious. Whatever the reason, however, it is clear that subdivision (b) of rule 41 could not confer jurisdiction on the Federal court that it did not otherwise have. Moreover, the rule is as a matter of Federal law construed in light of the policy behind it as a bar to subsequent action only in "situations in which the defendant must incur the inconvenience of preparing to meet the merits because there is no initial bar to the Court's reaching them" (Costello v United States, 365 U.S. 265, 286; Saylor v Lindsley, 391 F.2d 965, 969). Certainly if the Federal courts would not apply the Federal rule as a bar in the instant situation, we should not do so.
The quotation is from the decision dismissing the amended complaint, which was affirmed by the Court of Appeals for the Second Circuit.
Nor in light of the fact that the Federal court did not, because it could not, consider the State claim on the merits, can the fact that plaintiff was afforded two chances to plead in the Federal court (which, presumably, is what the Appellate Division referred to as "the history of the instant litigation") serve as the predicate for the Appellate Division's sua sponte dismissal for failure to state a cause of action, on the basis of motion papers grounded only on res judicata.
In sum, because Merrill Lynch has not sustained its burden of showing that the State claim was in fact considered in the Federal action, because as a matter of Federal law the State claim could not have been dismissed on the merits by the Federal court, and because it was improper to dismiss the present complaint for failure to state a cause of action, I would reverse the order of the Appellate Division and reinstate that of Special Term.
Judges JASEN, JONES, WACHTLER and FUCHSBERG concur in memorandum; Chief Judge COOKE dissents and votes to reverse in an opinion in which Judge GABRIELLI concurs; Judge MEYER dissents and votes to reverse in a separate dissenting opinion.