John Murray v. Crystex Composites LLC ( 2010 )

  •                                                                NOT PRECEDENTIAL
                          UNITED STATES COURT OF APPEALS
                               FOR THE THIRD CIRCUIT
                                         No. 09-2867
                                      JOHN MURRAY,
                               CRYSTEX COMPOSITES LLC
                       On Appeal From the United States District Court
                                 for the District of New Jersey
                                   (Civ. No. 2:08-cv-02672)
                         District Judge: Honorable William H. Walls
                         Submitted Under Third Circuit LAR 34.1(a)
                                    February 25, 2010
              Before: CHAGARES, STAPLETON, and LOURIE,* Circuit Judges
                                 (Opinion filed: May 6, 2010)
    CHAGARES, Circuit Judge.
          This appeal requires us to determine whether the District Court erred in granting
    summary judgment to appellees, Crystex Composites LLC (Crystex), on the ground that
           The Honorable Alan D. Lourie, Circuit Judge for the United States Court of
    Appeals for the Federal Circuit, sitting by designation
    appellant John Murray’s claim was barred by the entire controversy doctrine. For the
    reasons set forth below, we will affirm the District Court’s decision.
           Because we write solely for the benefit of the parties, we recite only the essential
    facts. In 2001, Spaulding Composites Company, Inc. (Spaulding) filed a bankruptcy
    petition in the District of New Hampshire and hired Murray, a Certified Public
    Accountant, as a consultant. Spaulding’s Mykroy/Mycalex Division (M&M)
    manufactured glass and ceramic electronic components. While working with Spaulding,
    Murray developed a relationship with George Flores, general manager of M&M. Murray
    became interested in purchasing M&M and managing it jointly with Flores. After
    notifying Spaulding’s creditors’ committee that he believed M&M to be a valuable asset,
    Murray took steps toward purchasing it. The bankruptcy court rejected Murray’s initial
    bid but suggested that Murray make an offer directly to one of Spaulding’s main
    creditors, CIT Business Group (CIT), to negotiate a purchase of M&M’s assets (an
    industrial property with a manufacturing plant, equipment, and machinery located in
    Clifton, New Jersey). CIT and Murray eventually agreed upon a purchase price of
    $764,000 for M&M’s assets.
           Flores and Murray began to assemble a group of investors who would become the
    equity owners of Crystex, to which M&M’s assets would be transferred. Flores, Murray,
    and a friend of Murray’s, Larry Milby, each agreed to invest $200,000. Milby’s niece,
    Donna Franks, also contributed $100,000. CIT issued a loan to Crystex for the balance of
    the purchase price, secured by pledges of stock in American BioMedica Corporation
    (ABMC) owned by Milby and Murray. Flores solicited three additional investors: Keith
    Savel, Howard Zimmerman, and David See, who agreed to invest $150,000 for a 10%
    interest in Crystex. A former Spaulding employee, Charles Rizkalla, was granted a 5%
    interest in Crystex as “sweat equity” in return for working at a reduced salary.
           Flores contributed his $200,000 and Milby contributed $190,000, but Murray
    failed to contribute any portion of the $200,000 he had pledged. Murray’s explanation
    was that his ABMC stock was “going to go through the roof” and it would be foolish to
    sell the stock before its value increased. Flores v. Murray, 
    2007 WL 3034512
     at *2 (N.J.
    Super. Ct. App. Div. Oct. 19, 2007) (per curiam). When Savel, Zimmerman, and See
    learned that Murray did not plan to make his contribution, they insisted that the parties
    execute a Memorandum of Understanding (MOU). The MOU, dated October 10, 2003,
    provided that Murray would contribute $200,000 within six months or “forfeit his shares
    and ownership in Crystex.” Appendix (App.) 39. Murray included a handwritten
    notation on the MOU, dated October 14, 2003, setting forth the parties’ ownership
    interests: 1) Murray-35.75%, 2) Flores-35.75%, 3) Milby-13.5%, 4) Savel, Zimmerman,
    and See-10%, and 5) Rizkella-5%. A corrected Certificate of Formation for Crystex was
    filed on October 15, 2003.1
           The original Certificate of Formation was filed on October 14, 2003, and named
    the company as Crystex Ceramics LLC instead of Crystex Composites LLC.
           On October 15, 2003, the bankruptcy court issued an order authorizing the sale of
    M&M’s assets to “John F. Murray, or his nominee.” App. 85. On October 23, 2003,
    Murray, acting as the Managing Member of Crystex, signed a resolution authorizing
    Crystex to purchase the M&M assets. On October 26, 2003, Spaulding transferred
    ownership of M&M’s assets to Crystex.
           Within several months, Flores grew concerned about Murray’s performance.
    Murray “refused to honor a financial obligation owed to one of the company’s
    manufacturing representatives, wanted to penalize valued customers, and used offensive
    language when dealing with Crystex’s accounts payable clerk.” Flores, 
    2007 WL 3034512
     at *5. Flores discovered that Murray was paying his son, a Crystex employee,
    an unauthorized salary out of the operating account instead of the payroll account. Some
    employees’ paychecks bounced after Murray forgot to transfer money into the payroll
    account. In addition, Murray still had not contributed his $200,000.
           On May 3, 2004, Flores called a special meeting of Crystex’s members where a
    majority voted that Murray “failed to live up to his obligations and that he no longer had
    an interest in Crystex.” Id. at *6. On February 18, 2005, the individual members of
    Crystex filed an action in the Law Division of the Superior Court of New Jersey, Flores v.
    Murray, requesting, inter alia, a declaratory judgment that due to Murray’s failure to make
    his capital contribution, he never had an ownership interest in Crystex, or in the
    alternative, that he no longer had an interest due to the action taken at the May 3, 3004
    meeting. Crystex was not originally a party to the action, but Murray later joined Crystex
    as a third-party defendant. Murray’s Counterclaim/Third Party Complaint alleged in part
    that the members of Crystex conspired to oust him before the true value of the assets
    became known. Murray’s Third Party Complaint also included a cause of action for
    unjust enrichment against the members as well as Crystex.
           Following a five-day bench trial in May 2006, the Law Division found that the
    MOU was an enforceable contract and that Murray violated his contractual obligations by
    failing to make his capital contribution. As a result, “Mr. Murray never acquired a
    membership interest in Crystex” App. 124. The Law Division also found that the
    members proved that Murray had no employment contract with Crystex, breached his
    fiduciary duty to the shareholders of Crystex, and fraudulently induced the members to
    invest in Crystex by promising to invest $200,000 of his own money.
           Murray appealed the Law Division’s decision. The New Jersey Superior Court
    Appellate Division affirmed in part and reversed in part. The Appellate Division reversed
    the trial court’s decision insofar as it awarded the members counsel fees and held that
    Murray fraudulently induced the members to invest in Crystex. Flores, 
    2007 WL 3034512
     at *1. In all other respects, the Appellate Court affirmed the judgment of the
    Law Division. The Appellate Division agreed that Murray’s “failure to deliver his
    contribution rendered his membership interest a nullity.” Id. at *11.
           On May 27, 2008, Murray filed this action seeking a declaratory judgment that
    Murray is the legal owner of the M&M assets and alleging that Crystex misappropriated
    the M&M assets and was unjustly enriched. Crystex moved for summary judgment and
    on May 29, 2009, the District Court granted Crystex’s motion and dismissed Murray’s
    complaint based on the entire controversy doctrine. The District Court held that Murray’s
    claims to ownership of the M&M assets arose from the same series of transactions as
    those underlying the New Jersey state court proceedings and that New Jersey’s entire
    controversy doctrine required Murray to assert his claims in the earlier proceedings. The
    District Court rejected Murray’s argument that his claims did not accrue until the state
    court determined that he had no ownership interest in Crystex. Murray timely appealed to
    this Court.
           The District Court had jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). This Court
    has jurisdiction pursuant to 28 U.S.C. § 1291.
           We review the District Court’s grant of summary judgment de novo, applying the
    same standard that it used. Lawrence v. City of Philadelphia, 
    527 F.3d 299
    , 310 (3d Cir.
    2008). We will affirm if “the pleadings, the discovery and disclosure materials on file,
    and any affidavits show that there is no genuine issue as to any material fact and that the
    movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2).
           The District Court relied on the New Jersey entire controversy doctrine to award
    summary judgment to Crystex.2 This doctrine is codified in Rule 4:30A of the New
    Jersey Court Rules 3 and “requires that a person assert in one action all related claims
    against a particular adversary or be precluded from bringing a second action based on the
    omitted claims against that party.” In re Mullarkey, 
    536 F.3d 215
    , 229 (3d Cir. 2008)
    (internal citations omitted). The doctrine prevents a party from withholding part of a
    controversy to litigate later, even if the withheld claim constitutes a separate and
    independent cause of action. Id. As the Supreme Court of New Jersey has explained:
           the entire controversy doctrine seeks to assure that all aspects of a legal
           dispute occur in a single lawsuit. The goals of the doctrine are to promote
           judicial efficiency, assure fairness to all parties with a material interest in an
           action, and encourage the conclusive determination of a legal controversy.
    Olds v. Donnelly, 
    696 A.2d 633
    , 637 (N.J. 1997). The doctrine does not apply to claims
    that are “unknown, unarisen or unaccrued at the time of the original action.” K-Land
    Corp. No. 28 v. Landis Sewerage Auth., 
    800 A.2d 861
    , 868 (N.J. 2002).
           Murray argues on appeal that his claim for ownership of the M&M assets had not
    arisen or accrued until after the Law Division entered final judgment establishing that
    Murray had no ownership interest in Crystex. Alternatively, Murray contends that
    considerations of fairness should prevent this Court from applying the entire controversy
    doctrine to his claims.
               The parties agree that New Jersey law applies to this case.
            “Non-joinder of claims or parties required to be joined by the entire controversy
    doctrine shall result in the preclusion of the omitted claims to the extent required by the
    entire controversy doctrine . . . .” R. 4:30A.
           Under New Jersey law, “a cause of action accrues when any wrongful act or
    omission resulting in any injury, . . . for which the law provides a remedy, occurs.”
    Beauchamp v. Amedio, 
    751 A.2d 1047
    , 1050 (N.J. 2000). Murray relies on cases in
    which the entire controversy doctrine did not bar later claims to collect legal fees from an
    earlier litigation, S & A Realty Corp. v. Kearny Industrial Associates, LLP, 
    2007 WL 2323492
     (N.J. Super. Ct. App. Div. Aug. 16, 2007), and to collect on a prior judgment,
    Karo Marketing Corp., Inc. v. Playdrome America, 
    752 A.2d 341
    , 343 (N.J. Super. Ct.
    App. Div. 2000). In those cases, the wrongful acts occurred after the commencement of
    litigation. That is not the case here. Crystex had been in possession of the assets at issue
    since October 2003, long before the state court litigation commenced and the Law
    Division issued its judgment. The wrongful act resulting in Murray’s purported damages
    occurred at the time of the underlying transaction. The Superior Court’s decision did not
    result in Murray’s alleged injury – rather, according to Murray’s claims, his injury was
    caused by the circumstances surrounding the transfer of M&M’s assets.
           Murray argues that it would be contrary to the entire controversy doctrine’s
    fairness requirement to bar his claims against Crystex and relies upon the New Jersey
    Supreme Court’s decision in K-Land. In K-Land, the City of Vineland had filed a
    complaint against K-Land and other parties seeking a declaratory judgment establishing
    ownership of a force main financed by K-Land. K-Land Corp., 800 A.2d at 863-64. K-
    Land had no preference amongst the potential owners of the force main because it had
    reached agreement with the relevant parties on almost all of K-Land’s rights to
    reimbursement. K-Land failed to respond to the City’s complaint and a default judgment
    was entered against it. The other parties to the City’s law suit later agreed to a consent
    judgment that went beyond the issue of ownership and was prejudicial to K-Land’s right
    to reimbursement for the costs related to installation of the force main. Id. at 865. K-
    Land instituted an action against the sewerage authority and another land owner seeking
    reimbursement. The trial court dismissed K-Land’s action as barred by the entire
    controversy doctrine, and the Appellate Division affirmed. Id. at 867.
           The New Jersey Supreme Court overturned the Appellate Division, emphasizing
    that “the polestar for the application of the entire controversy rule is judicial fairness.” Id.
    at 871 (internal marks omitted). Because the City’s declaratory judgment suit sought to
    clear title only, and at the time, the reimbursement issue had been mostly resolved, K-
    Land was not on notice that the suit implicated its right to reimbursement. Id. The K-
    Land court noted that the leading entire controversy doctrine cases “appear to have
    involved deliberate and calculated claim-splitting strategies . . . as opposed to an innocent
    omission by an uninformed litigant.” Id. at 868 (citations omitted).
           Unlike K-Land, Murray was not an “uninformed litigant” and he was not
    indifferent to the outcome of the first litigation. The Flores complaint requested a
    judgment that Murray had no ownership interest in Crystex. As previously noted, Murray
    was aware that Crystex was in possession of the M&M assets. Thus, Murray was on
    notice that the dispute over Crystex in the Flores litigation implicated his potential rights
    to the M&M assets.
           Judicial efficiency and fairness to the parties weigh in favor of applying the entire
    controversy doctrine in this case. Murray’s claims involve the same parties and the same
    underlying transaction as the Flores litigation. The central inquiry is whether the claims
    “arise from related facts or the same transaction or series of transactions.” Fields v.
    Thompson Printing Co., 
    363 F.3d 259
    , 265 (3d Cir. 2004). The factual allegations
    Murray sets forth in this action track the facts at issue in the state court litigation: the
    events leading up to the purchase of the M&M assets, the formation of Crystex, and the
    transfer of assets from Spaulding to Crystex. Thus, there is a “sufficient commonality of
    facts” to apply the entire controversy doctrine to Murray’s complaint. See id. Under
    these circumstances, piecemeal litigation would delay complete adjudication of the
    controversy and “unnecessarily clog [the] courts with multiple lawsuits arising out of the
    same transaction and having a common nucleus of facts.” See Highland Lakes Country
    Club and Cmty. Ass’n v. Nicastro, 
    988 A.2d 90
    , 92 (N.J. 2009).
           For the foregoing reasons, we will affirm the judgment of the District Court.