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Poloron Products Inc. v. Bros.

decided: April 5, 1976.

POLORON PRODUCTS, INC. (WITH SUBSTITUTION APPLIED FOR BY DYNAMARK CORPORATION, ASSIGNEE), PLAINTIFF-APPELLANT,
v.
LYBRAND ROSS BROS. & MONTGOMERY, DEFENDANT AND THIRD-PARTY PLAINTIFF-APPELLEE, V. POLORON PRODUCTS OF INDIANA, INC., SAMUEL LEVITT, CARL LEVITT, JAY LEVITT, DYNAMARK CORPORATION AND GEORGE FEIWELL, THIRD-PARTY DEFENDANTS



Appeal from an order of the United States District Court for the Southern District of New York, William C. Conner, District Judge, 66 F.R.D. 610 (S.D.N.Y. 1975), dismissing the amended complaint on the ground that Rule 41(a)(1), Fed. R. Civ. P., rendered two prior voluntary dismissals of the same action an adjudication on the merits and created a res judicata bar to the instant action. Also pending before this Court are motions to dismiss the appeal as moot and to substitute Dynamark Corporation as Plaintiff-Appellant. The motion to substitute is granted; the motion to dismiss the appeal is denied; and the order of the district court is reversed. Remanded to the district court for further proceedings.

Oakes, Van Graafeiland and Meskill, Circuit Judges.

Author: Meskill

MESKILL, Circuit Judge:

Poloron Products, Inc. ("Poloron") appeals from an order of the United States District Court for the Southern District of New York, Conner, J., dismissing its amended complaint on the ground that two prior voluntary dismissals of the action by the plaintiff in the present action had the effect of a dismissal on the merits. The district court's opinion is reported at 66 F.R.D. 610 (S.D.N.Y. 1975). The district court held that the instant suit was barred by the doctrine of res judicata because of the so-called "two dismissal" rule set forth in Rule 41(a)(1), Fed. R. Civ. P., quoted infra.

Before deciding the merits of the appeal we must first decide if it is properly before us. The right to pursue the appeal was assigned to Dynamark Corporation ("Dynamark") by Poloron shortly after the district court had dismissed the complaint and shortly after Poloron had settled all its claims against the defendant, Lybrand Ross Bros. & Montgomery ("Lybrand"). Lybrand contends that the assignment is champertous and therefore invalid under New York law and that because Poloron is no longer a party the appeal is moot. On the merits of the appeal Lybrand claims that even if the "two dismissal" rule does not create a res judicata bar, a result which it certainly does not concede, the complaint was properly dismissed in any event since the allegations contained therein failed to state a cause of action.

This case arises from the 1967 sale of the Levitt Manufacturing Company ("LMC") by its owners, Carl and Jay Levitt, to Poloron. Lybrand, a public accounting firm, prepared LMC's balance sheet, upon which a major term of the sale depended. The Levitts gave Poloron their personal guarantees of the balance sheet's accuracy. After the sale, Poloron caused LMC's name to be changed to Poloron Products of Indiana, Inc. ("Poloron-Indiana"). Later Poloron's own accountants discovered that LMC's assets apparently had been substantially overstated. When Poloron learned of this, it caused Poloron-Indiana to withhold certain payments due Dynamark under a sales representative agreement which LMC had entered into with Dynamark, a corporation wholly owned by the Levitts.

First Suit

In May, 1970, the Levitts and Dynamark initiated an action against Poloron-Indiana in the United States District Court for the Northern District of Indiana to recover the sales commissions they claimed had been withheld improperly. In September, 1970, they amended their complaint to add Lybrand as a defendant on the theory that the losses were ultimately the result of the false balance sheet prepared by Lybrand. Dynamark alleged that Lybrand's false statements in the balance sheet constituted a violation of Section 10(b) of the Securities Exchange Act of 1934. On Poloron-Indiana's motion the action was then transferred to the Southern District of New York in November, 1970. Subsequently, the Levitts and Dynamark served and filed an amended complaint realleging the claims against Lybrand and adding Poloron, the parent corporation and a party to the sale, as a defendant. Later, Poloron and Samuel Levitt agreed that the losses which they had both sustained were principally the result of Lybrand's false financial statements. They agreed to terminate the pending litigation and assign all of their rights to damages to Poloron, which would pursue the action alone against Lybrand only. The settlement agreement provided that Dynamark would bear seventy-five percent of the costs of litigation and enjoy the same percentage of any recovery. The agreement further provided that under certain conditions Poloron would be required to reassign its entire claim back to Dynamark upon the latter's demand. Apparently, Lybrand was not made aware of the terms of the settlement agreement. On July 7, 1971, a stipulation of discontinuance, signed by all parties, was filed in the district court.

Second Suit

Thereafter, on December 30, 1974, pursuant to the earlier settlement agreement, Poloron brought an action against Lybrand in the United States District Court for the Northern District of Illinois. The allegations against Lybrand were substantially similar to those charged against it in the first suit. On January 26, 1972, however, the United States Court of Appeals for the Seventh Circuit announced its decision in Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972), holding that the Illinois three-year statute of limitations for securities cases rather than its five-year general fraud statute of limitations "best effectuates" the federal policy for actions brought under Section 10(b) of the Securities Exchange Act of 1934, and must be used in actions brought in Illinois under the federal act. Afraid that that decision would time bar its action in the Northern District of Illinois, Poloron filed a notice of dismissal of this action under Rule 41(a)(1)(i), Fed. R. Civ. P., before any responsive pleadings had been served.

Third Suit

Shortly thereafter, Poloron refiled the same suit in the Southern District of New York, where the statute of limitations had not yet run on its claim. After the filing of an answer, a counterclaim and a third-party complaint against Poloron-Indiana, Carl Levitt, Jay Levitt, Dynamark and George Feiwell,*fn1 Lybrand moved to dismiss the action on the theory that the "two dismissal" rule barred the action and, alternatively, that the complaint failed to state a cause of action. On April 3, 1975, the court granted Lybrand's motion based on the "two dismissal" rule and dismissed Lybrand's counterclaims against the other parties.*fn2

Subsequently, Poloron and Lybrand settled all of their remaining differences, including the counterclaims against Poloron. Dynamark, however, demanded, pursuant to its agreement with Poloron, that it be assigned the right to proceed with an appeal. Poloron agreed to the assignment, and Lybrand stipulated that its settlement with Poloron would not by itself bar Dynamark's right to appeal. Lybrand, however, reserved its right to challenge the validity of the assignment of Poloron's claim back to Dynamark. With Lybrand's permission, Dynamark filed a timely notice of appeal in Poloron's name, even though the actual assignment of the claim did not occur until afterward.

In this Court Lybrand moved for dismissal of the appeal on the ground that the assignment to Dynamark was champertous under New York law and therefore invalid, and that since Poloron no longer had an interest in the appeal, it was ...


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