B. The Preclusive Effect of the Consent Decree
Defendant next asks that I dismiss the section 10(b) claim on issue preclusion grounds. According to defendant, the Estate's stake in the Limited Partnership interests has already been determined in the Surrogate's Court. The Estate entered into a settlement providing it with 50% of those interests, and the Surrogate endorsed this settlement, giving it the force of a court order. Thus, the argument goes, plaintiffs cannot "relitigate" in this Court issues resolved by that consent order, even if plaintiffs properly invoked section 10(b).
The issue, however, is not one of collateral estoppel. Plaintiffs do not ask this Court to reconsider issues resolved by the court-endorsed settlement. Instead, they claim that they were induced by fraudulent misrepresentations to enter into that settlement. That claim was not addressed by the Surrogate's Court, or any other court for that matter. Therefore, nothing in the Surrogate Court's order precludes me from considering plaintiff's 10(b) claim.
There is however a separate issue that demands attention: the ability of plaintiffs to seek relief in this Court for the the fraud they have alleged. In defendant's view, the full faith and credit doctrine of 28 U.S.C. § 1738 requires plaintiffs to move before the Surrogate to set aside her order, and forecloses a "collateral attack" in this Court. That view is directly at odds with the view of the Second Circuit in Slotkin v. Citizens Cas. Co. of New York, 614 F.2d 301, 312 (1979), cert. denied, 449 U.S. 981, 66 L. Ed. 2d 243, 101 S. Ct. 395, 101 S. Ct. 396 (1980), which held that separate actions for fraud like the one at bar are cognizable under the laws of New York.
Plaintiffs in Slotkin had originally settled a personal injury claim in state court, relying on representations made by defendants concerning the extent of their insurance coverage. After the parties read a stipulation of settlement into the record but prior to its approval by the court, plaintiffs learned that the defendants had understated the amount of their policy. Despite this discovery, plaintiffs urged the court to approve the settlement because of problems associated with retrying the case, a request the court granted. Plaintiffs then brought a diversity claim for common law fraud in federal district court, claiming that the defendants had fraudulently induced them to settle their prior lawsuit.
See 614 F.2d at 310
The district court ultimately dismissed the complaint,
holding that the action was barred because plaintiffs had insisted on having the settlement approved after learning of the misrepresentations. See id. The Second Circuit disagreed, and stated that plaintiffs' choice to accept the settlement did not, under the circumstances, constitute a waiver of their right to sue for fraud. In coming to its conclusion, the Second Circuit explicitly recognized that plaintiffs had such a right to waive. The court stated: "the law of New York is clear that one who has been induced by fraudulent misrepresentation to settle a claim may recover damages without rescinding the settlement." Id. at 312. This makes sense, said the court, because otherwise a fraudsman would have nothing to lose. The only consequence of a discovered fraud would be recission of the settlement and a new trial. See id.
The language of Slotkin is clear: under the law of New York, a settling party has the right to challenge a settlement in a separate action for fraud, and need not seek its recission in the court that approved it.
Defendant seeks to avoid Slotkin by pointing to an arcane distinction in New York law between "intrinsic" fraud and "extrinsic" fraud. A line of New York cases has held that a court should "set aside or annul a judgment at law on the ground of fraud only where the fraud is extrinsic or collateral to the matter tried in the original action, and not where the fraud was in the matter on which the judgment was rendered." Tamimi v. Tamimi, 38 A.D.2d 197, 328 N.Y.S.2d 477, 483. Fraud is "extrinsic . . . when its effect is to prevent the unsuccessful party from having a trial or from presenting his case fully, as, for instance, keeping him away from court by false promise or compromise, or purposely keeping him in ignorance of the pendency of the action." Id. This doctrine is essentially designed to preserve the finality of litigated judgments, and prevent parties from challenging them when they are founded on perjured evidence. See, e.g. Crouse v. McVickar, 207 N.Y. 213, 217-19, 100 N.E. 697 (1912); Tamimi at 484.
This doctrine has no relevance to the instant case. Plaintiffs do not seek to set aside a litigated judgment based on fraudulent misrepresentations made at trial. Rather, they seek damages and equitable relief for fraud allegedly committed by defendant in negotiating a settlement. Slotkin expressly acknowledged the viability of such a cause of action under New York law, and I am obliged to follow that holding. Therefore, I reject defendant's full faith and credit argument.
Defendant asks me to abstain from exercising jurisdiction over the section 10(b) claim,
since the pending proceedings in the Surrogate's Court raise similar allegations of misconduct on his Seymour Cohn. However, federal courts have exclusive jurisdiction over 1934 Act claims, see 15 U.S.C. § 78aa, a fact that makes abstention as to plaintiff's section 10(b) claim improper. This is so, despite the existence of related state court proceedings. In the Second Circuit's words:
Federal courts must hear claims within their exclusive jurisdiction, for otherwise the right alleged would never be fully adjudicated. The ability to raise federal claims in state proceedings has always been a prerequisite to Younger abstention, and it is clear as well that abstention for purposes of judicial economy under Colorado River applies only where concurrent federal-state jurisdiction exists.