United States District Court, Southern District of New York
July 17, 1991
EDWARD CRESSWELL, ET AL., PLAINTIFFS,
SULLIVAN & CROMWELL AND PRUDENTIAL BACHE SECURITIES, INC., DEFENDANTS. PERCY HERBERT MEADOWS, ET AL., PLAINTIFFS, V. SULLIVAN & CROMWELL AND PRUDENTIAL BACHE SECURITIES, INC., DEFENDANTS. EDWARD CRESSWELL, ET AL., PLAINTIFFS, V. SULLIVAN & CROMWELL, DEFENDANT. ELIZABETH E. NOBLE, ET AL., PLAINTIFFS, V. SULLIVAN & CROMWELL AND PRUDENTIAL BACHE SECURITIES, INC., DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
In Cresswell v. Sullivan & Cromwell, 87 Civ. 2685 (RWS)
("Cresswell II"), defendant Sullivan & Cromwell ("S & C") has
moved on remand for summary judgment dismissing the complaint
of plaintiff Edward Cresswell ("Cresswell"). In Meadows v.
Sullivan & Cromwell, 88 Civ. 2221 ("Meadows"), plaintiff Percy
Herbert Meadows ("Meadows") has moved to stay all proceedings,
and in Cresswell v. Sullivan & Cromwell, 91 Civ. 0333
("Cresswell III"), and Noble v. Sullivan & Cromwell, 91 Civ.
0676 ("Noble") plaintiffs Cresswell and Elizabeth E. Noble
("Noble") have moved to remand their cases to the New York
State Supreme Court. Cresswell has also moved to stay or
dismiss Cresswell II. For the following reasons, S & C's motion
is granted, the other motions are denied, and summary judgment
is entered in S & C's favor on all of the complaints.*fn1
The parties, underlying facts, and prior proceedings are
fully described in the prior opinions of this Court and the
Court of Appeals, familiarity with which is assumed.
Cresswell v. Sullivan & Cromwell, 922 F.2d 60 (2d Cir. 1990),
rev'g 704 F. Supp. 392 (S.D.N.Y. 1989).
In December 1990, the Second Circuit opinion reversed on
jurisdictional grounds the grant of summary judgment in S & C's
favor on the Cresswell II fraud claim and remanded it to this
Court for consideration in light of the proper jurisdictional
basis. Shortly thereafter, Cresswell and Noble instituted the
Cresswell III and Noble actions in New York State Supreme
Court, essentially repeating the allegations and claims for
relief made in Cresswell II and in Meadows.
On January 15, 1991, S & C removed both of the new actions to
this Court and at the same time moved for summary judgment
dismissing Cresswell II. On February 19, Cresswell responded
with his motion to remand Cresswell III and to stay or dismiss
Cresswell II, and on February 20 Meadows and Noble filed moved
to remand Noble and to stay Meadows. All of the motions were
argued and fully submitted on March 29.
1. There Is Jurisdiction Over the Cresswell II Fraud
In seeking to differentiate the claim in Cresswell II from
those in the New Actions, Plaintiffs assert that the Second
Circuit impliedly dismissed their common law fraud claim
against S & C and upheld federal jurisdiction only over their
equitable claims. Arguing that they never intended to assert
such claims and that as "masters of their complaints" they have
the right to determine which claims they will press and which
law will govern those claims, they seek dismissal of Cresswell
II and permission to prosecute their common law claims in the
only court which they believe has subject matter jurisdiction
those claims, namely the New York State court.
However, analysis of the Circuit Court's opinion indicates
that it did not dismiss any of the Plaintiffs' claims and
instead explicitly upheld this Court's jurisdiction to
At the outset of its jurisdiction discussion, the Court of
Appeals summarized its decision, stating
[W]e conclude that there is neither diversity
jurisdiction nor federal question jurisdiction
under the provisions relied on by plaintiffs. We
are persuaded, however, that the district court
had ancillary equitable jurisdiction to entertain
922 F.2d at 68. The court proceeded to clarify that
"plaintiffs' claim is that S & C committed common-law fraud."
Id. at 69.
After dismissing diversity and federal question as the basis
for jurisdiction, the court again stated
Notwithstanding the absence of federal question
jurisdiction and the apparent absence of
diversity, however, we concluded for the reasons
below that the court had ancillary equitable
jurisdiction to entertain an attack on the
Cresswell I judgment.
Id. at 70.
Following an explanation of the origins of this type of
jurisdiction, the court, finding that "[a]ncillary jurisdiction
is sufficiently flexible that the action may be maintained
against a person who was not a party to the original action,"
id., concluded that "the district court had ancillary equitable
jurisdiction over the present claims against S & C." Id.
Thus, the Circuit Court held that this Court "had . . .
jurisdiction to entertain the action," an action in which
"plaintiffs' claim is that S & C committed common-law fraud,"
which represented "an attack on the Cresswell I judgment." Far
from dismissing any of the Plaintiffs' claims, the Court of
Appeals explicitly held that there was jurisdiction over the
Plaintiffs' "present claims." There is simply no support in the
opinion for the Plaintiffs' contention that in speaking of the
"present claims against S & C" the Court of Appeals meant to
refer to anything but the claims pled in the Cresswell II
complaint. Therefore there is federal jurisdiction over the
Cresswell II claims.
2. In Holding That Equitable Standards Would Govern the
Plaintiffs' Fraud Claim, the Court of Appeals Implied
that the Claim Was Federal in Nature.
Significantly, the Circuit Court did not merely hold that
this Court would have had equitable ancillary jurisdiction if
the Plaintiffs' had chosen to frame their fraud claim in
equity, but rather determined that there was jurisdiction over
the claim as it had been pled. Moreover, after expressly
acknowledging that the claim was for common-law fraud, the
Circuit Court stated that
Considering this issue solely as a matter of law,
we would concluded that the district court did not
err in [finding no reliance as a matter of law.]
As indicated . . . above, however, the present
action is not an action at law, but is one
addressed to the court's equity powers.
Id. at 71. In other words, although recognizing that the
Plaintiffs had pled their claim as a legal one, the Court of
Appeals held that it actually sounded in equity.
Apparently, the Court of Appeals concluded that the
Plaintiffs' claim, charging fraud in connection with the entry
of judgment in Cresswell II, was a federal equitable claim
disguised through the technique of artful pleading as a state
common law claim. The technique of looking beyond the words of
the complaint to discern the true nature of the plaintiffs'
claim, typically referred to as the "federal character"
doctrine, was approved by the Supreme Court in Federated
Department Stores, Inc. v. Moitie, 452 U.S. 394, 397 n. 2, 101
S.Ct. 2424, 2427 n. 2, 69 L.Ed.2d 103 (1981). There the Court
held that the district court had properly granted removal where
the plaintiffs' claims, although framed solely as state law
claims, "had a
sufficient federal character to support removal." The Court
justified this disregard of the plaintiffs' choice of claims as
[C]ourts "will not permit plaintiff to use artful
pleading to close off defendant's right to a
federal forum . . . [and] occasionally the removal
court will seek to determine whether the real
nature of the claim is federal, regardless of
Id. (quoting 14 C. Wright, A. Miller & E. Cooper, Federal
Practice and Procedure § 3722, pp. 564-66) (1966) (ellipsis and
brackets in quoted material added in Federated).
The Second Circuit has acknowledged that under
Federated a plaintiffs' control over its complaint must be
tempered by the fact that it may not evade removal simply by
pleading a federal claim in non-federal terms.
[I]t is well-settled that a plaintiff as "master
of the complaint" may preclude removal by electing
to disregard an available federal dimension of a
claim and asserting only a distinct state law
cause of action. A corollary to these principles,
however, is that a plaintiff cannot avoid removal
by artful pleading, i.e., by framing in terms of
state law a complaint the "real nature of [which]
is federal regardless of plaintiffs'
Derrico v. Sheehan Emergency Hospital, 844 F.2d 22
, 27 (2d Cir.
1988) (quoting Travelers Indemnity Co. v. Sarkisian,
794 F.2d 754
, 758 (2d Cir.), cert. denied, 479 U.S. 885
, 107 S.Ct. 277
93 L.Ed.2d 253 (1986)) (citations omitted, brackets in
Derrico); accord Nordlicht v. New York Telephone Co.,
799 F.2d 859
, 862 (2d Cir. 1986).
In Travelers Indemnity, the Court of Appeals articulated a
two-part test to determine whether a claim ought to be
considered as federal in nature. First, there should be
"substantial identity between the elements of the state and
federal claim." 794 F.2d at 760. Where that threshold
requirement was satisfied, "the second criterion that rendered
[plaintiff's] claim 'federal' [was] the fact that he had
previously elected to proceed in federal court." Id.
Applying this test to the Plaintiffs' claims here, the Second
Circuit's decision clearly implies that the court found the
requisite "substantial identity" between the common law fraud
claim which the Plaintiffs had pled and their implied federal
equitable claim. As for the second prong of the test, the
Plaintiffs had repeatedly sought to have their case adjudicated
in the federal forum, insisting that federal jurisdiction
existed over the claim both in their complaint and even after
the Second Circuit raised the issue sua sponte. Plaintiffs even
offered to drop the claims of three parties in order to
preserve diversity jurisdiction. See Cresswell II, 922 F.2d at
69. Thus the Travelers Indemnity test is satisfied and
Plaintiffs' claim must be held to be of federal character.
Therefore, under the governing authority of the Supreme Court
and the Second Circuit, the Court of Appeals' treatment of the
Plaintiffs' appeal indicates that the Cresswell II fraud claim
is in reality a federal equitable claim disguised as a state
common law claim.
3. The Claims in the Other Three Actions Are Also "Federal
Because the complaint in Meadows is virtually identical to
the Cresswell II complaint, the conclusion that the Cresswell
II fraud claim falls within the Federated "federal character"
exception to the "master of the complaint" doctrine applies to
the Meadows fraud claim as well.
As for the New Actions, which are themselves nearly
identical, they each contain two fraud claims, one for "Fraud
in Connection with the Exchange Inquiry" and a second for
"Fraud in Connection with the Exchange Investigation." Both
complaints also include a claim for relief under § 487 of the
New York Judiciary Law*fn2 — the
same claim which the Plaintiffs were prevented from adding in
Cresswell II by this Court's denial of leave to amend, 704
F. Supp. at 411-12, a ruling which was affirmed on appeal. 922
F.2d at 72.
Comparison of the Cresswell II and Cresswell III complaints
leads to the conclusion that the fraud claims alleged in the
newer action are not meaningfully different from the fraud
claim in the older case. While the original claim has been
split into two separate claims, the allegations of both claims,
when combined, virtually repeat the allegations in Cresswell
II. Therefore, the preceding discussion compels the conclusion
that the Cresswell III and Noble fraud claims are also federal
4. The Motions to Remand.
Given the foregoing analysis, the removal of the New Actions
was proper and the motions to remand Cresswell III and Noble
must be denied. Although the § 487 claim in each action is
clearly a state law claim, the Plaintiffs' decision to join
those claims with their fraud claims justifies removal of both
of the New Actions in their entirety under 28 U.S.C. § 1441(c).
While this approach effectively permits Plaintiffs to
circumvent the denial of their original motion to amend in
Cresswell II, it seems to present the best hope of resolving
this litigation with any semblance of judicial efficiency.*fn3
See also Valerio v. Boise Cascade Corp., 645 F.2d 699 (9th
Cir.) (federal court properly asserted pendent jurisdiction
over state law claims asserted together with federal equitable
claim for fraud in earlier settlement), cert. denied,
454 U.S. 1126, 102 S.Ct. 976, 71 L.Ed.2d 113 (1981).
Because the motions to remand are denied, it is not necessary
to address the motions to stay or to dismiss Cresswell II and
to stay Meadows pending resolution of the New Actions. Because
the fraud claims in all four actions are the same and all are
properly presented in this Court, resolution of one will
effectively dispose of all.
5. The Motion for Summary Judgment.
a. The fraud claim is not a claim for "fraud on the court."
According to the Plaintiffs, summary judgment on the
equitable fraud claim in Cresswell II is not warranted because
reliance is not an element of an equitable claim for "fraud on
the court" as defined by the Supreme Court in Hazel-Atlas Glass
Co. v. Hartford-Empire Co., 322 U.S. 238
, 64 S.Ct. 997, 88
L.Ed. 1250 (1944). Plaintiffs argue that because this Court
previously found a genuine issue of fact as to S & C's intent
and as to the materiality of the non-disclosures, S & C is not
entitled to summary judgment on the equitable fraud claim.
The major obstacle which the Plaintiffs must overcome in
making this argument is the Court of Appeals' discussion of the
proper standard to be applied to their claim on remand.
[I]n order to pursue an independent action to set
aside a judgment, a plaintiff
must show a recognized ground, such as fraud . .
., for equitable relief and that there is no
other available or adequate remedy. It must also
appear that the situation in which the party
seeking relief finds himself is not due to his
own fault, neglect or carelessness. In this type
of action, it is fundamental that equity will not
grant relief if the complaining party "has, or by
exercising proper diligence would have had, an
adequate remedy at law, or by proceedings in the
original action . . . to open vacate, modify, or
otherwise obtain relief against, the judgment."
The granting of relief in this unusual type of
proceeding lies largely within the discretion of
the trial judge.
Cresswell II, 922 F.2d at 71 (quoting Winfield Associates, Inc.
429 F.2d 1087
, 1090 (10th Cir. 1970)) (emphasis in Cresswell II).
The Circuit Court further commented
Most important for purposes of the present cases
is the principle that in order to obtain the
requested equitable relief a plaintiff must show
"the absence of fault or negligence" on his own
Id. (quoting Bankers Mortgage Co. v. United States,
423 F.2d 73
, 79 (5th Cir.), cert. denied, 399 U.S. 927
, 90 S.Ct. 2242
26 L.Ed.2d 793 (1970)).
The Plaintiffs contend that the Court of Appeals erred in
this respect, arguing that it overlooked the controlling
precedent of Hazel-Atlas Glass. They support this argument by
pointing out that the entire jurisdictional issue was raised by
the court sua sponte during oral argument and briefed only
summarily by the parties after argument, with no attention to
the standards which would govern if an alternate jurisdictional
basis was found. They therefore assert that the court's
enunciation of the standards to govern on remand must be viewed
as dicta and should not control this Court's decision on
S & C responds that the Plaintiffs' fraud claim does not rise
to the level of fraud on the court, and that therefore the
standard set forth by the Court of Appeals is appropriate, and
Plaintiffs must show that they were not responsible for the
harm which befell them. Moreover, S & C asserts that even if
the Court of Appeals' opinion was clearly erroneous the law of
the case doctrine would require this Court to follow that
The essence of a claim of fraud on the court is a purposeful
effort "which seriously affects the integrity of the normal
process of adjudication." Gleason v. Jandrucko, 860 F.2d 556,
559 (2d Cir. 1988) (citing Kupferman v. Consolidated Research
and Mfg. Corp., 459 F.2d 1072, 1078 (2d Cir. 1972) and 7
Moore's Federal Practice ¶ 60.33, at 360). While Plaintiffs
rely on Kupferman to support their argument that their claim
alleges fraud on the court, the court in that case specifically
declined to hold that an attorney's failure to disclose
relevant information necessarily constituted such fraud: "it
would be going to far to characterize as 'fraud upon the court'
[the attorney's] failure to disclose an instrument which he
could have supposed reasonable — although, as it now appears,
erroneously — to have been known to his adversary." Kupferman,
459 F.2d at 1081.
Similarly, in Gleason the court was faced with a challenge to
a prior settlement in which the plaintiff asserted that several
witnesses had lied in their depositions in the earlier action.
In declining to classify this behavior as fraud on the court,
the court commented
Gleason cannot be heard now to complain that he
was denied the opportunity to uncover the alleged
fraud. While the officers may have lied at their
depositions, nothing prevented plaintiff during
the pendency of the prior proceedings from
deposing the two eyewitnesses to the bank robbery
in order to impeach the officers' testimony.
Instead, however, Gleason voluntarily chose to
settle the action.
860 F.2d at 559.
Likewise, in Martina Theatre Corp. v. Schine Chain Theatres,
Inc., 278 F.2d 798 (2d Cir. 1960), another case upon which
Plaintiffs rely, the court distinguished the situation
presented in that case from that in Hazel-Atlas Glass, stating
When the parties moved for a dismissal of the
[earlier action] with prejudice pursuant to
stipulation, the district court had no duty to
ascertain whether the settlement conformed with
the antitrust laws . . .; it sufficed for the
court to know the parties had decided to settle
without inquiring why.
Id. at 801.
Therefore, the Court of Appeals' decision not to view the
Plaintiffs' equitable fraud claim as one for fraud on the court
is more than amply supported by the relevant legal precedent.
Moreover, even were this not the case the standard announced
by the Second Circuit would govern. Where an issue has been
resolved upon appeal, on remand a lower court must adhere to
under the doctrine of the law of the case. "[T]he lower court
has no discretion to disregard that duty." Soto-Lopez v. New
York City Civil Service Union, 840 F.2d 162, 167 (2d Cir.
1988). Even if the prior decision were clearly erroneous, it
would be up to the appellate court to correct its error.
[The lower court] cannot vary [the higher court's
ruling], or examine it for any other purpose than
execution; or give any other or further relief; or
review it, even for apparent error, upon any
matter decided upon appeal. . . .
In re Sanford Fork & Tool Co., 160 U.S. 247
, 255, 16 S.Ct. 291,
293, 40 L.Ed. 414 (1895). Therefore, as the Court of Appeals
obviously intended to define the standard which would govern
the remand, that definition could not be refused even if it
were clearly incorrect.
b. The Plaintiffs have not shown that they are entitled to
The Court of Appeals' decision quite explicitly places the
burden upon the Plaintiffs to show the absence of negligence on
their part. 922 F.2d at 71. On the present motion, the
Plaintiffs have not met this burden. Having devoted virtually
their entire argument to the question of whether the claim
should be viewed as one for fraud on the court, the sole
evidence which they present to support their claim of no
negligence consists of yet another declaration from Edward Swan
("Swan"), the Plaintiffs' original attorney in the underlying
litigation, who merely re-emphasizes that he believed what he
had been told by S & C, even when he was presented with
information which might have contradicted those
representations. Nothing in the new declaration is sufficient
to overcome the conclusions which this Court drew in the
original grant of summary judgment that Swan had adequate
knowledge and opportunity to uncover any wrongdoing on S & C's
part, and that his failure to do so constitutes a basis for
denying Plaintiffs their requested relief.
Therefore, as the Plaintiffs have failed to establish a
factual issue as to their own attorney's diligence and the
absence of neglect in uncovering the alleged fraud, summary
judgment dismissing the fraud claim in Cresswell II is
warranted. Because the fraud claims in the other three actions
are indistinguishable from that in Cresswell II, those claims
will be dismissed as well.
c. Summary judgment is appropriate on the § 487 claims.
Although S & C's original motion for summary judgment did not
address the § 487 claims which are part of both of the New
Actions, in their briefs on the present motions they have
requested judgment on these claims, arguing that the claims are
untimely. Because the facts already in the record and based on
the prior rulings in this Court and on appeal summary judgment
is granted on the § 487 claims.
S & C contends that the limitations period applicable to
§ 487 claims is either the three year period specified in §
214(2) of the N.Y.C.P.L.R., which covers "an action to recover
upon a liability, penalty or forfeiture created or imposed by
statute" or the one year period of § 215(4) for "an action to
enforce a penalty or forfeiture created by statute and given
wholly or partly to any person who will prosecute." Under
either provision, the Plaintiffs' claim, which accrued no later
than 1985 when the Cresswell I lawsuit was settled, would
appear to be barred. While it is not clear on the present
record whether there might be grounds for tolling the
limitations period, the prior ruling that the Plaintiffs' 1988
attempt to add the § 487 claim to their complaint in Cresswell
II was untimely in light of the inexcusable delay and prejudice
to S & C raises a strong possibility that any attempt to toll
the statute would be offset by the Plaintiffs' laches. Cf. G.D.
Searle & Co. v. Cohn, 455 U.S. 404, 411, 102 S.Ct. 1137, 1143,
71 L.Ed.2d 250 (1982) (discussing New Jersey approach to
offsetting tolling and laches provisions).
Moreover, an element of a claim under § 487 is that the
attorney's deceit must have caused the plaintiff's damages. In
light of this Court's prior ruling that as a
matter of law the Plaintiffs could not show that their damages
were traceable to the alleged fraud of S & C rather than the
negligence of Swan — a ruling which was expressly approved by
the Second Circuit, 922 F.2d at 71 — the Plaintiffs will not
be able to satisfy this element.*fn4
Therefore, because there are ample grounds in the present
record upon which the § 487 claims should be dismissed, summary
judgment will be granted on these claims as well. Because the
Plaintiffs have not been given an opportunity to contest this
issue, leave will be granted to submit within twenty days of
the date of this opinion any facts or authorities in relation
to the propriety of this grant of summary judgment.
For all of the foregoing reasons, the various motions of the
Plaintiffs in each of these four actions are denied, the
summary judgment motion by S & C in Cresswell II is granted,
and on that basis the complaint in Cresswell III is dismissed
and the claims against S & C in the other three cases are
It is so ordered.