On March 25, 1997, Justice Lehner's decision was affirmed by the Appellate Division, First Department. Bryan v. Newman, No. 60366N, slip op., (1st Dep't March 25, 1997).
Defendants' motion raises three issues: (a) whether the doctrine of res judicata bars this case because Justice Lehner purportedly held that the Mutual Release was valid in granting the Article 75 petition to stay the arbitration proceedings; (b) whether, even assuming the validity of the Mutual Release was not adjudicated by Justice Lehner, the clear language of the Mutual Release bars this action as a matter of law; and (c) whether, under Colorado River Water Conser. Dist. v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976), this Court should abstain in deference to the South Carolina state court proceedings.
A. Res Judicata
Plaintiff argues that the Mutual Release is not valid because his signature was obtained by fraud. Hootie contends that plaintiff's claims as to the validity of the Mutual Release are barred by the doctrine of res judicata because plaintiff had the opportunity to raise such claims in his challenge to the Mutual Release in the Article 75 proceeding but failed to do so.
Under the doctrine of res judicata, "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 1997 WL 183481, at *4 (2d Cir. April 9, 1997) (quoting Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994)). The Full Faith and Credit Clause of the Constitution requires that federal courts give state court judgments "the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered." Id. (quoting Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81, 79 L. Ed. 2d 56, 104 S. Ct. 892 (1984)). Thus, to determine whether plaintiff's claims are precluded, this Court must look to New York law.
New York courts have adopted the transactional approach to the doctrine of res judicata, which bars "a later claim arising out of the same factual grouping as an earlier litigated claim even if the later claim is based on different legal theories or seeks dissimilar or additional relief." Burgos, 14 F.3d at 790 (citations omitted). In addition, the prior judgment must constitute a final judgment "on the merits." 641 Avenue of the Americas Ltd. Partnership v. 641 Assocs., Ltd., 189 B.R. 583, 588 (S.D.N.Y. 1995). Res judicata does not apply, however, where "'the initial forum did not have the power to award the full measure of relief sought in the latter litigation'" or "'formal jurisdictional or statutory barriers' prevented [the plaintiff] from 'presenting to a court in one action the entire claim including any theories of recovery or demands for relief that might have been available to him under applicable law.'" Jacobson, 111 F.3d 261, 1997 WL 183481, at *5 (citing Burgos, 14 F.3d at 790 (internal quotations omitted)).
In general, Article 75 proceedings (to stay or compel arbitration) are given preclusive effect by federal courts. Sewell v. New York City Transit Auth., 809 F. Supp. 208, 213 (E.D.N.Y. 1992). As neither party disputes that the Article 75 decision constitutes a "final judgment," the only issues are (1) whether there was a judgment "on the merits" and (2) whether this case involves issues that were or could have been litigated in the Article 75 proceeding.
Plaintiff argues that there was no decision "on the merits" in the Article 75 proceeding because Justice Lehner did not consider the "merits" of Neuman's contract and fraud claims. (Pl. Am. Mem. in Opp. to Mot. to Dismiss at 35). Defendants respond that the Article 75 decision was on the "merits" with respect to the issue of the validity of the Mutual Release. Defendants contend that to reach his decision that the Mutual Release was valid, Justice Lehner considered -- and rejected -- plaintiff's fraud claims, citing the portion of his opinion that concluded that Neuman had "not in any manner contested the validity of the release and termination, nor asserted that it is in any manner ambiguous or unclear." (Def. Ex. 7 at 1-3).
Justice Lehner's decision makes it clear that he did not believe that Neuman had attacked the validity of the Mutual Release. Likewise, a review of Neuman's opposition papers in the Article 75 proceeding shows that he did not attack the validity of the release. Hence, Justice Lehner did not reach the issue. Moreover, even assuming that Neuman had attacked the validity of the Mutual Release, Justice Lehner was of the view that he did not have the power -- in the context of the Article 75 proceeding -- to consider the issue. As Justice Lehner noted, "questions as to coercion and fraud in obtaining a termination agreement [i.e., an agreement terminating or cancelling an agreement to arbitrate] would be for the arbitrator." (Id. at 3 (citing Schlaifer v. Sedlow, 51 N.Y.2d 181, 184 n.1, 433 N.Y.S.2d 67, 412 N.E.2d 1294 (N.Y. 1980) ("it may be that" whether cancellation agreement was induced by coercion or fraud is question for the arbitrator)); but see In re Minkin, 279 A.D. 226, 108 N.Y.S.2d 945, 949 (2d Dep't 1951) (suggesting that cancellation agreement may be set aside for coercion or duress only in an "action in equity brought for that purpose"), aff'd, 304 N.Y. 617, 107 N.E.2d 94 (N.Y. 1952); Rochdale Village, Inc. v. Public Serv. Employees Union, Local No. 80, 605 F.2d 1290, 1295-96 (2d Cir. 1979) (whether termination of arbitration agreement is an issue for the court or for arbitrators will depend on scope of arbitration clause and circumstances of termination). It would appear, from the language in his decision, that had Neuman raised the issue of fraud in the inducement with respect to the Mutual Release, Justice Lehner would have denied the petition to vacate the arbitration demand, for the issue of the validity of the Mutual Release would have been -- in his view -- an issue for arbitration.
It would appear then that Neuman arguably was entitled to have an arbitrator decide the issue of the validity of the Mutual Release.
Having failed to raise the issue before Judge Lehner, however, Neuman must be deemed to have waived his right to arbitrate that issue.
The question remains as to whether the doctrine of res judicata bars Neuman from now claiming that he was induced into executing the Mutual Release by fraud and misrepresentation. I hold that it does not. The issue of the validity of the Mutual Release was not actually litigated before Justice Lehner, nor, in Justice Lehner's view, could it have been. If the issue had been raised, Justice Lehner would have held that it was an issue for arbitration.
Likewise, plaintiff's claims on the merits are not barred by the doctrine of res judicata because these claims could not have been litigated in the Article 75 proceeding. The scope of the Article 75 proceeding was limited to determining whether the Mutual Release, which Justice Lehner essentially assumed to be valid, terminated the parties' obligation to arbitrate. Justice Lehner did not consider, and could not have considered, the merits of plaintiff's underlying claims. See C.P.L.R. § 7501 (in determining the validity of an arbitration agreement, "the court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute").
Accordingly, the res judicata defense is rejected.
B. The Effect of the Mutual Release
Defendants argue that the language of the Mutual Release terminated the obligations of both parties under the Marketing Agreement and Management Contract. (Def. Mem. in Supp. Mot. to Dismiss at 11). Plaintiff responds that the Mutual Release does not bar the claims because (1) ambiguities exist in the language of the Mutual Release, (2) defendants' intention in executing the Mutual Release was only to eliminate any prospective obligations to perform under the contracts, and (3) the Mutual Release is void in any event because plaintiff was induced into signing it by fraud.
Under New York law, the general law of contract applies in interpreting a release. Cahill v. Regan, 5 N.Y.2d 292, 184 N.Y.S.2d 348, 354, 157 N.E.2d 505 (N.Y. 1959). It is well settled that New York law requires that "a release contain 'an explicit, unequivocal statement of a present promise to release defendant from liability.'" Bank of America National Trust and Savings Assn. v. Gillaizeau, 766 F.2d 709, 713 (2d Cir. 1985) (citations omitted). The words must manifest the releasor's intent to discharge and the dispositive element in determining the scope of a release is the parties' intent. Id.; Albany Savings Bank v. Halpin, 918 F. Supp. 553, 557 (N.D.N.Y. 1996) (the intent of the parties "governs the scope of a release").
The Mutual Release in this case is not clear and unequivocal. It states in pertinent part:
That ARTIST, being signatorys [sic] to the above referenced agreement, wish to terminate this management contract, and in so doing release MANAGER from any further responsibilities to ARTIST thereunder.
That MANAGER, being a signatory to the above referenced agreement wishes to terminate this management contract, and in so doing agrees to release ARTIST from any further responsibility to MANAGER under the above referenced agreement.