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McLearn v. Cowen & Co.

decided: September 28, 1981.

MILDRED A. MCLEARN, PLAINTIFF-APPELLANT,
v.
COWEN & CO. AND MERRILL LYNCH PIERCE FENNER & SMITH, INCORPORATED, DEFENDANTS-APPELLEES .



Appeal from an order entered in the United States District Court for the Southern District of New York, Metzner, J., denying plaintiff's post-judgment motion to amended the judgment. Reversed and remanded to amend the judgment to dismiss plaintiff's state law claim for lack of jurisdiction.

Before Lumbard and Meskill, Circuit Judges, and Lasker,*fn* District Judge.

Author: Lumbard

The plaintiff, Mildred A. McLearn, appeals from a 1980 order of the Southern District of New York that denied her motion under Fed.R.Civ.P. 60(a) to clarify a 1976 judgment dismissing her complaint. Plaintiff sought clarification that the dismissal of her cause of action under state law was not on the merits so that she would be free to pursue that claim under state law in the New York state courts. The district court denied plaintiff's motion, finding no omission subject to relief under Rule 60(a) and, alternatively, that the plaintiff's state law claim had been properly dismissed on the merits.

I believe that nothing done in the district court by the parties or the court justified the district court in exercising jurisdiction over the state law claim with respect to taking any action on the merits of the state law claim. Although the record is ambiguous as to what the 1976 district court order meant to do regarding the merits of the state claim, I am convinced that the district court had no power to make any order about the merits of the state claim. Consequently, I would reverse and remand with directions to amend the order of dismissal to provide that it is without prejudice to the merits of any claim under state law. As Judge Lasker concurs in this result, we so order.

I.

The complaint filed in the Southern District in 1975 followed the pattern of the many complaints filed in that district in recent years against brokers and investment bankers. It sought damages from the plaintiff's investment adviser and broker, Merrill Lynch Pierce Fenner & Smith, Inc., under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. The allegations of the third cause of action set forth a customer-broker relationship, reliance by the plaintiff on the judgment and integrity of Merrill Lynch's officials in handling her account, and that those officials acted in an unprofessional, negligent and illegal manner and in "breach of the common law standards of fiduciary responsibility." Thus, to the claims under federal law was added a common law claim the merits of which is governed by the law of New York. This cause of action was pendent to the federal claims. Although all three causes of action were alleged to arise from the same operative facts namely, the handling of plaintiff's account by Merrill Lynch it is well settled that the state law claim could be heard in the federal courts only if some cause of action in the complaint showed a basis for federal jurisdiction.

In 1975, the defendants moved to dismiss the complaint for failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b). The court granted the motion with leave to amend. After plaintiff amended her complaint, defendants again moved to dismiss. In an order dated January 12, 1976, the court dismissed McLearn's complaint with prejudice. No testimony was taken; no trial was held. The order read, in pertinent part:

The complaint still fails to set forth the facts and circumstances of the alleged fraud and must be dismissed.

This court affirmed that order without opinion on May 27, 1976.

Neither Judge Metzner's memorandum opinion, or the order of dismissal, referred specifically to the state cause of action.*fn1 Undoubtedly, at this point, or even after we had affirmed the dismissal, counsel should have applied to the district court to amend its order to deal specifically with the survival of the state cause of action.

Thereafter, Mildred McLearn filed suit in the Westchester County Supreme Court against Merrill Lynch alleging the common law cause of action of breach of fiduciary duty. The Supreme Court denied a motion to dismiss on the ground of res judicata. The Appellate Division reversed, holding that the complaint should have been dismissed on res judicata grounds. 64 A.D.2d 606, 406 N.Y.S.2d 538 (1978). The Court of Appeals affirmed the dismissal, with three judges dissenting, 48 N.Y.2d 696, 422 N.Y.S.2d 60, 397 N.E.2d 750 (1979). The majority's per curiam opinion held that the district court's dismissal was on the merits for failure to state a cause of action, relying on Rule 41(b) Fed.R.Civ.P., which provides that a dismissal is on the merits unless the contrary expressly appears. 48 N.Y.2d at 699, 422 N.Y.S.2d 60, 397 N.E.2d 750. In dissent, Chief Judge Cooke argued that the federal court would not exercise jurisdiction where the federal claims are dismissed prior to trial, citing Second Circuit decisions. See, e. g., CES Publishing Corp. v. St. Regis Publications, Inc., 531 F.2d 11 (2d Cir. 1975); Nolan v. Meyer, 520 F.2d 1276 (2d Cir.), cert. denied, 423 U.S. 1034, 96 S. Ct. 567, 46 L. Ed. 2d 408 (1975); Kavit v. A. L. Stamm & Co., 491 F.2d 1176 (2d Cir. 1974); Iroquois Industries v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S. Ct. 2199, 26 L. Ed. 2d 561 (1970). Judge Meyer in his dissent went further and wrote that "as a matter of Federal law the State claims could not have been dismissed on the merits by the Federal court" where the dismissal of the federal claims was in advance of trial because the federal court was left without subject matter jurisdiction of the State claim. Consequently, the federal dismissal was not res judicata.

The plaintiff then moved the Court of Appeals for reargument, which the court denied on January 20, 1981, in the following brief order:

Motion for waiver of thirty day time limit and for reargument denied, without prejudice to renewal in the event the Federal District Court amends its order to show it declined to exercise pendent jurisdiction over the state court action, with ...


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