Reiner Jahn, a former employee of B.N.E. who took part in the transactions at issue, and Claude Heroys, a employee of the International Mexican Bank Ltd., and conducted further document discovery. The document discovery tended to establish that Banker paid for many personal expenses with corporate funds. As a result, the parties have entered into a stipulation that effectively removes the corporate veil issue from the case. See McPheters Affidavit P9; Stipulation and Order PP5, 9 (Sept. 11, 1991).
The Defendants filed their motion on January 22, 1992. B.N.E. responded and filed its motion on February 17, 1992. Oral argument was heard on February 27, and submissions received through March 5, 1992.
I. Collateral Estoppel
The Defendants suggest that their "motion is quite simple and rests on the uncontestable fact that having had -- and taken advantage of -- a full and fair opportunity to litigate its predicate breach of contract claim and having had that claim rejected in toto,. . . BNE is collaterally estopped from relitigating that issue here." Defendants' Reply Memorandum 2-3.
The short answer is that the Defendants' argument is simply untenable given that the Magistrate Judge assumed that a valid contract had been formed for purposes of her ruling. See Opinion 24-25. There is no evidence in the record suggesting otherwise. The long answer is that the use of collateral estoppel to bar litigation of the contract issues would be improper.
Preclusion rules are expressed through the doctrines of res judicata, or "claim preclusion," and collateral estoppel, or "issue preclusion". Res judicata precludes a party, or those in privity with the party, from relitigating claims that were or could have been raised in a prior action that is final on the merits. See Fay v. South Colonie Central School District, 802 F.2d 21, 28 (2d Cir. 1986). Although both parties hint at elements of res judicata in their arguments, the doctrine is inapplicable to the present situation. Instead, the Defendants invoke collateral estoppel, which generally precludes relitigation of issues identical to those raised and necessarily decided in a prior proceeding.
A. Federal Preclusion Rules Apply
The Opinion was rendered by a federal district court sitting in diversity in Connecticut. Contrary to the parties' assumption, New York law does not control the collateral estoppel issue and it is not entirely clear that federal law should control. If the attachment proceeding was brought in a Connecticut state court, this Court would have to give that proceeding the same preclusive effect a Connecticut state court would have given it. See, e.g., Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 79 L. Ed. 2d 56, 104 S. Ct. 892 (1984); Golino v. City of New Haven, 950 F.2d 864, 869 (2d Cir. 1991); Don King Productions, Inc. v. Douglas, 742 F. Supp. 741, 750 (S.D.N.Y. 1990). However, the law of the Second Circuit is unclear as to which forum's preclusion law should be applied by a federal court sitting in diversity examining the proceedings of another federal diversity action. See Gelb v. Royal Globe Insurance Co., 798 F.2d 38, 42 n.3 (2d Cir. 1986), cert. denied, 480 U.S. 948, 94 L. Ed. 2d 794, 107 S. Ct. 1608 (1987); Johnson v. Eli Lilly & Co., 689 F. Supp. 170, 172 (W.D.N.Y. 1988); see also 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4472.
In Gelb, the Second Circuit declined to decide this choice of law issue, but did express a strong preference for federal preclusion rules: "It would seem that federal courts must possess an equivalent power and that federal law should determine the preclusive effect of a federal judgment, without regard to the basis of jurisdiction." Gelb, 798 F.2d at 42 n.3 (citing Restatement (Second) of Judgments § 87 (1982) and Degnan, Federalized Res Judicata, 85 Yale L.J. 741 (1976)). Therefore, to the extent that there is a difference between federal and Connecticut preclusion laws, this Court will apply federal law. Hoppe v. G.D. Searle & Co., 779 F. Supp. 1425, 1426 (S.D.N.Y. 1991); Carlin v. Gold Hawk Joint Venture, 778 F. Supp. 686, 690 (S.D.N.Y. 1991); Phoenix Canada Oil Co. v. Texaco Inc., 749 F. Supp. 525, 533 n.12 (S.D.N.Y. 1990); Johnson, 689 F. Supp. at 173. Contra In re New York Asbestos Litigation, 738 F. Supp. 66, 68 (E.D.N.Y. 1990).
For collateral estoppel to apply,
(1) the issues in both proceedings must be identical, (2) the issue in the prior proceeding must have been actually litigated and actually decided, (3) there must have been a full and fair opportunity for litigation in the prior proceeding, and (4) the issue previously litigated must have been necessary to support a valid and final judgment on the merits.
Gelb, 798 F.2d at 44. These rules should not be applied mechanically, however, to protect against unfairness. See Hoppe, 779 F. Supp. at 1427; cf. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979). Finally, due process prohibits the operation of preclusion against a party who was not present or privy to a prior proceeding. Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 28 L. Ed. 2d 788, 91 S. Ct. 1434 (1971).
B. The Prior Decision was Practically Final
As noted in Don King Productions, there are exceptions to the finality requirement. Typically this occurs "where a ruling is rendered 'practically' final owing to factors demonstrating 'that it was not avowedly tentative, the adequacy of the hearing, and the opportunity for review". Don King Productions, 742 F. Supp. at 754 (quoting Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 89 (2d Cir. 1961), cert. denied, 368 U.S. 986, 82 S. Ct. 601, 7 L. Ed. 2d 524 (1962)).
Under Connecticut law, an attachment proceeding is "limited to a determination of whether or not there is probable cause to sustain the validity of plaintiff's claim". Conn. Gen. Stat. § 52-278d(a). Such a proceeding is interlocutory, and not a final determination on the merits. It is considered final for the purposes of appeal in Connecticut. Id. § 52-278l(a).
Here, B.N.E. choose to bring the satellite action in Connecticut solely to obtain the attachment. After the Supreme Court ruled the ex parte component of Connecticut's attachment provision unconstitutional, B.N.E. sought to continue the stay.
The Magistrate Judge conducted a full hearing that lasted three days. Testimony was heard from witnesses, and cross-examination conducted. Both sides fully briefed the pertinent issue to the Magistrate Judge and the District Court. Under the unusual circumstances presented here, the prior determination may be considered "practically" final for purposes of collateral estoppel. See Miller Brewing Co. v. Joseph Schlitz Brewing Co., 605 F.2d 990, 995-96 (7th Cir. 1979), cert. denied, 444 U.S. 1102, 62 L. Ed. 2d 787, 100 S. Ct. 1067 (1980); Lummus Co., 297 F.2d at 89.
C. The Contract Issues Were not Necessary to the Prior Decision
The reference to the Magistrate Judge was for the limited purpose of determining whether the attachment on Banker's residence should be lifted. This required determining whether there existed probable cause to believe Banker was personally liable for any damages suffered by B.N.E. The other Defendants were not parties to that proceeding.
The Magistrate Judge stated four grounds for dissolving the attachment: (1) that Global Financial intended to enter into these contracts as a principal rather than as an agent; (2) that B.N.E. was on notice that it was dealing with a corporate entity, not Banker; (3) that there was no basis for piercing the corporate veil; and (4) that there was insufficient evidence of fraud. Relying on case law holding that, where a court states multiple grounds for its decision, the parties may be collaterally estopped from relitigating each of those grounds, the Defendants seek to bar B.N.E. from litigating the viability and terms of the underlying contracts. See, e.g, Winters v. Lavine, 574 F.2d 46, 67 (2d Cir. 1978).
If, however, an issue is not necessary to a prior holding, relitigation of the issue is not barred in a subsequent proceeding. See Brown v. Felsen, 442 U.S. 127, 139, 60 L. Ed. 2d 767, 99 S. Ct. 2205 n.10 (1979); In re PCH Associates, 949 F.2d 585, 593 (2d Cir. 1991); Jim Beam Brands Co. v. Beamish & Crawford Ltd., 937 F.2d 729, 734 (2d Cir. 1991), cert. denied, 117 L. Ed. 2d 415, 112 S. Ct. 1169 (1992); Balderman v. United States Veterans Administration, 870 F.2d 57, 62 (2d Cir. 1989). As to the contract issue, that plainly was not necessary to the Magistrate Judge's determination. First, it was assumed that a valid contract had been formed. Second, it appears that the Magistrate Judge only focused on a limited set of documents concerning only one of the two transactions at issue. Third, whether Global intended to enter into these contracts as a principal or an agent is immaterial as to whether Banker may have been personally liable for any breach of that assumed valid contract as a principal or an agent.
The Defendants therefore cannot avail themselves of collateral estoppel to bar relitigating the contract issues. See In re PCH Associates, 949 F.2d at 593; Jim Beam, 937 F.2d at 735.
The stipulation between the parties concerning any evidence that may be introduced at trial concerning commingling of funds by Banker essentially removes the Magistrate Judge's second and third findings from the case. See Stipulation and Order P9 (Sept. 11, 1991). The Court therefore declines to determine the collateral effect of these findings.
The Magistrate Judge's fourth finding was necessary to her holding. Although arguably an alternative holding, it was necessary for the Magistrate Judge to find that Banker personally did not fraudulently induce B.N.E. to enter into the transactions to dissolve the order of attachment. Further, the Magistrate Judge assumed for purposes of the hearing that the complaint before her had been amended to add Pestel, and presumably determined that she played no role in any alleged fraud. Cf. Opinion, slip op. at 27 n.31. The fraud issue is identical to both proceedings, and it appears that the matter was fully and fairly litigated. B.N.E. is therefore collaterally estopped from litigating the fraud issue, see Gelb, 798 F.2d at 44, and the Defendants entitled to summary judgment on Count III of the amended complaint.
The Defendants rely chiefly on the collateral estoppel arguments in making their motion for summary judgment. Because litigation of the contract issues is not precluded, the remainder of their motion for summary judgment is denied. Leave is granted to renew their motion for summary judgment on other grounds.
II. B.N.E.'s Cross-Motion
B.N.E. has cross-moved for summary judgment on the first count of the amended complaint. This motion is primarily sought through the operation of Rule 36 of the Federal Rules of Civil Procedure based on a Request to Admit served on the Defendants October 4, 1991.
The Defendants untimely served their response on B.N.E. on January 15, 1992. The Court, however, allowed the response to be served, resulting in the requests not being deemed admitted. See Fed. R. Civ. P. 36(a). It therefore would be inappropriate to address the merits of B.N.E.'s motion for summary judgment on the present record. Leave is granted to renew this motion as well on a more fully developed record.
To summarize, B.N.E. is precluded from relitigating the issue of fraud in the inducement, and not from litigating the contract issues. The Defendants' motion for summary judgment is granted with respect to the third count of the amended complaint, and denied in all other respects. B.N.E.'s motion for summary judgment is denied. Leave is granted to all of the parties to renew their motions for summary judgment on other grounds.
It is so ordered.
New York, N. Y.
April 27, 1992
ROBERT W. SWEET