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January 25, 2000


The opinion of the court was delivered by: Kahn, District Judge.


This action involves claims of bodily injury and property damage arising from the application of Defendant's pesticide to Plaintiffs' residence. Defendants removed the case from state court upon diversity grounds, and now seek to dismiss, or in the alternative, stay the action pursuant to the Federal Arbitration Act, 9 U.S.C. § 3, 4 ("FAA"). Plaintiffs' in turn have cross-moved to disqualify Defendant's law firm, McElroy, Deutsch & Mulvaney ("McElroy"), on the basis of alleged improper direct communications with Plaintiffs in violation of D.R. 7-104. For the reasons set forth below, Defendant's motion to stay the action is granted, and Plaintiffs' motion to disqualify McElroy is conditionally granted.


Plaintiff Bruce Trimper entered into a service contract with Defendant on April 3, 1996, for the application of pesticide to his family home in Rotterdam, New York. Defendant made the application on April 11 and August 1 of that year. Plaintiffs then claimed property damage and bodily injury arising from the pesticide application. On September 8, 1997, Defendant filed a Demand for Arbitration of any claims related to or arising out of its obligations under the Termite Service Plan.

Plaintiffs filed a petition in the Supreme Court of the State of New York, County of Schenectady, seeking to stay the demand for arbitration. Defendant responded with a motion to dismiss. On January 7, 1998, Justice Vito C. Caruso issued a decision dismissing Plaintiffs' petition and ordering the arbitration to go forward. Plaintiffs filed a notice of appeal and a notice of motion for an extension of time in which to perfect the appeal, but the latter motion was denied, and the time in which to appeal Justice Caruso's decision has expired.

On April 2, 1999, Plaintiffs filed a complaint in Supreme Court, County of Schenectady, and Defendant removed the action to this Court on the basis of diversity.


A. Defendant's Motion to Dismiss or Stay

1. Res Judicata

Defendant contends that the arbitration agreement contained in the contract is within the scope of the FAA and the arbitration should go forward and the current action dismissed, or, in the alternative, stayed pending arbitration pursuant to the FAA, 9 U.S.C. § 3. Defendants argue that the prior state court ruling precludes this action under res judicata.

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." Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994) (quoting Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980)). The doctrine of collateral estoppel has a narrower scope but a broader application. It bars the relitigation of only those issues that actually were decided in the previous case, rather than encompassing issues that could have been litigated but were not. The fact that the prior ruling in this action took place in state court is irrelevant. 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, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984)). New York state law therefore guides this Court's analysis.

In deciding res judicata claims, New York follows the transactional analysis approach. "Under this address, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy." O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357, 445 N.Y.S.2d 687, 429 N.E.2d 1158 (N.Y. 1981). However, "before full res judicata effect can be given to a prior judgment it must be shown that the prior judgment was a final adjudication on the merits." McNaughton v. Hudson, 50 A.D.2d 863, 377 N.Y.S.2d 140 (2d Dep't 1975). In addition, a claim is not barred by res judicata if the court in which the first action was brought lacked subject matter jurisdiction to adjudicate that claim. See Salwen Paper Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 72 A.D.2d 385, 391, 424 N.Y.S.2d 918 (2d Dep't 1980). In short, res judicata would not bar Plaintiffs' instant action if the argument on which it is based — the applicability of the arbitration clause to the initial treatment — was incapable of resolution in the prior state proceeding due to jurisdictional or statutory barriers.

As a threshold issue, this Court must determine whether Justice Caruso's dismissal constitutes a final judgment on the merits. Plaintiffs apparently do not contest that Justice Caruso's dismissal constitutes a final judgement (indeed, the Court has searched in vain for any response from Plaintiffs as to the res judicata argument raised by Defendant), but the Court nevertheless undertook such a review and concludes that the dismissal was a final judgment on the merits of Plaintiffs' previous petition. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1984), is instructive. The actual issue in Moses Cone focuses on the question of whether a federal court properly may abstain from deciding a petition for enforcement of a commercial arbitration agreement brought under section 4 of the FAA, deferring instead to a parallel state court action brought by the party resisting arbitration involving, inter alia, a claim that the underlying dispute was not arbitrable under the parties' arbitration agreement — the very argument advanced by Plaintiffs' here. In reaching this question, the Supreme Court initially was required to decide whether the stay order issued by the federal district court with regard to the petition to compel arbitration was a "final decisio[n]" for purposes of appellate jurisdiction under 28 U.S.C. § 1291. The Court determined that the question of arbitrability was the only substantive issue presented by the petition to compel arbitration brought in federal district court and held further that because the state court's judgment on that issue would be res judicata, the district court's stay order amounted to a dismissal of the suit. Consequently, Justice Caruso's dismissal of Plaintiffs' petition meets the requirements of a final judgment on the merits.

That prior dismissal, however, went to four arguments that are not advanced here. Instead, Plaintiff asserts a theory not previously argued before Justice Caruso, specifically, that the Termite Service Plan containing the broad arbitration clause at issue did not apply to the initial application but only subsequent retreatments. Any disputes arising from the initial treatment would therefore fall outside the ...

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