Plaintiff-shareholders appeal from orders of the United States District Court for the Eastern District which dismissed their securities law action on the ground that a prior state-court action precluded federal litigation of identical issues. Affirmed.
Meskill, Kearse and Cardamone, Circuit Judges
CARDAMONE, Circuit Judge:
The Crux of this appeal involves an analysis of res judicata. Broadly, res judicata means that a matter once judicially decided is finally decided. Like a river with more than one branch, res judicata embraces two concepts: issue preclusion and claim preclusion. Issue preclusion refers to the preclusive effect of a judgment that prevents a party from litigating a second time an issue of fact or law that has once been decided. Issue preclusion is often called collateral estoppel. The river's second branch is sometimes referred to by the same name as the river itself. That is to say, claim preclusion, the second concept, is sometimes also called res judicata. Under the doctrine of claim preclusion a judgment, once rendered by a court of competent jurisdiction, will be treated thereafter as the "full measure of relief to be accorded between the same parties on the same . . .'cause of action.'" Kaspar Wire Works, Inc. v. Leco Engineering & Machine, Inc,. 575 F.2d 530, 535 (5th Cir. 1978). Claim preclusion prevents litigation of a matter that could have been raised and decided in a previous suit, whether or not it was raised. See Migra v. Warren City School District Board of Education, 465 U.S. 75, 104 S. Ct. 892, 894 n.1, 79 L. Ed. 2d 56 (1984); 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure §§ 4402, 4403 (1981); Restatement (Second) of Judgments, Introductory Note before ch. 3 at 131 and §§ 18, 19 (1982). Although fair play demands that a party have his day in court, the doctrine of res judicata forecloses a second day. For purposes of this appeal and in the interest of consistency int his area confusing terminology, we will refer to res judicata only in its broad context encompassing its two separate branches, issue preclusion and claim preclusion.
The litigation on appeal presents an unfortunate legal battle for corporate control of a successful family business established by the generation that preceded the parties before us. Plaintiffs are Edward H. and Joan M. Murphy, owners of approximately 15% of the shares of defendants United States Dredging Corporation, Neptune Line, Inc., and Gallagher Brothers Sand and Gravel Corporation (collectively referred to as the Corporations). Also named as defendants are Peter C. and Michael J. Gallagher, James and John Murphy, their attorney, George Catallo, nine individuals who are present or former shareholders of the Corporations, and three other corporations related to the Corporations. The first four named defendants are directors of the Corporations and own approximately 33% of their stock. The remaining shares are held in family trusts controlled by defendants or owned by other family members.
The events directly leading to this lawsuit occurred over a relatively brief period during the fall of 1979. In October 1979 three shareholders, Regina Adams, Maureen Gibbons, and Nannette Meyers, offered, through their attorney-in-fact defendant Catallo, to sell their shares in the Corporation. They made the offers pursuant to shareholders agreements dated April 16, 1956. The agreements required that selling shareholders first offer their shares to the other shareholders according to the proportionate ownership of corporate stock. If any of the other shareholders declined the initial offer, then the unsold portions of shares would be re-offered to those who had accepted the offer and purchased in the first round.
Within a month of initial offering, plaintiffs accepted the offer to purchase all shares offered them in the first round. Because some shares remained unsold, the three selling shareholders sent offers to sell their unsold shares to the shareholders who had accepted during the first-round offering in October. Plaintiffs accepted the second offering. In their letter of acceptance plaintiffs contended that the first-round acceptances of some of the other shareholders, including the director-defendants, were invalid because those shareholders had not given proper notice of their acceptance pursuant to the shareholder agreements. By the terms of the offers, payment was due on November 26, 1979. Just before that date plaintiff Edward Murphy was fired from his position with the Corporation. Thereafter, neither he nor his wife tendered payment for the shares they had contracted to purchase. The plaintiff's shares were then re-offered to and purchased by the other shareholders, including the defendants, who had tendered payment.
Federal Proceeding Commenced
In July, 1980 plaintiffs filed a complaint in the United States District Court for the Eastern District of New York. In their first cause of action against the five individual defendants, plaintiffs alleged violations of § 10(b) of the Securities and Exchange Act of 1934 (1934 Act) and SEC Rule 10b-5 charging that defendants had engaged in a scheme to defraud them in connection with the sale of the Corporations' stock. The complaint also included 13 pendent state claims alleging corporate waste and mismanagement, improper exclusion of plaintiff Edward Murphy from the management of and his wrongful discharge from the Corporations, and breach of the shareholders agreements. Six of the state causes of action were asserted only against the corporate defendants.
Plaintiffs charged that the four director-defendants engaged in a scheme to defraud the minority shareholders and gain control of the Corporations. They claimed that defendants had persuaded the three shareholders to sell by withholding dividends and failing to disclose information regarding corporate profitability to shareholders. They also asserted that defendants had appointed their own attorney as attorney-in-fact for the selling shareholders and thus carried out the sale contrary to the provisions of the shareholders agreements. And, finally, plaintiffs claimed that by excluding Edward Murphy from the management of the Corporations and by discharging him just before payment for the shares was due, defendants created a financial hardship for the plaintiffs that impaired their ability to purchase the stock offered to them. Plaintiffs asserted that the result of this scheme was to put defendants in control of the Corporation.
In March 1981 defendants moved to dismiss plaintiffs' complaint. Following an evidentiary hearing, District Judge Thomas Platt dismissed the 13 pendent state claims, including those asserted against the six corporate defendants. Although recognizing that it had the power to decide the pendent claims, the district court dismissed these state claims because they substantially predominated by number and by nature, the 15 pendent parties substantially outnumbered the five defendants to the federal claim, the federal claims appeared to be of questionable validity, and the impetus for the entire suit was an inter-family quarrel. See United Mine Workers v. Gibbs, 383 U.S. 715, 726-27, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966)
At the same time, the district court denied defendants' motion to dismiss plaintiffs' complaint for failure to state a federal claim or to allege fraud with particularity. In a well-reasoned opinion, Judge Platt narrowed plaintiffs' Rule 10b-5 claim. Murphy v. Gallagher, No. 80-1343 (E.D.N.Y. Apr. 20, 1981). He dismissed allegations that defendants persuaded the selling shareholders to sell, finding plaintiffs were not injured by the alleged fraud. He also dismissed allegations that defendants failed to disclose material facts because plaintiffs could not show that the alleged nondisclosures were connected to the ...