Linda Metcalf v. Merrill Lynch, Pierce, Fenner , 587 F. App'x 719 ( 2014 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-3118
_____________
LINDA METCALF; MICHELLE HARTLEY;
FILMWEST PRODUCTIONS, LLC;
SUNSET CAPITAL MANAGEMENT, INC,
d/b/a Spirit Halloween; DO YOU KNOW WHERE YOUR PARENTS ARE, LLC,
Appellants
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC;
LAWRENCE R. BELLMORE, JR.; SOLAR WIND PRODUCTIONS, LLC;
MICHAEL JACOBS; RUBY HANDLER-JACOBS; RIO GRANDE STUDIOS, LLC;
ROBIN BRUBACHER
____________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
(D.C. Civ. No. 4-11-cv-00127)
District Judge: Honorable Matthew W. Brann
____________
Argued: September 9, 2014
____________
Before: RENDELL, GREENAWAY, JR. and BARRY, Circuit Judges
(Opinion Filed: October 9, 2014)
____________
Maxwell S. Kennerly, Esq. (Argued)
The Beasley Firm
1125 Walnut Street
Philadelphia, PA 19107
Counsel for Appellants
William E. Mahoney, Jr., Esq. (Argued)
William T. Mandia, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
2005 Market Street
Philadelphia, PA 19103
Counsel for Appellees Merrill Lynch, Pierce, Fenner & Smith, Inc. and Robin Brubacher
____________
OPINION
____________
BARRY, Circuit Judge
Appellants Linda Metcalf, Michelle Hartly, FilmWest Productions, LLC, and
Sunwest Capital Management, LLC, and Do You Know Where Your Parents Are?, LLC
(together, “FilmWest”), sought to produce a feature length film based on a screenplay
written by Metcalf. In April 2009, FilmWest deposited $200,000 into a Merrill Lynch,
Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) account controlled by a financing partner,
Solar Wind Productions LLC (“Solar Wind,” together with its owners Michael Jacobs
and Ruby Handler-Jacobs). Solar Wind soon appeared to FilmWest to be a fraud, and
FilmWest sought to reclaim its deposit in an action filed in June 2009 in the Second
Judicial District Court of New Mexico (the “New Mexico Action”).
Trojan Productions (“Trojan”), another apparent victim of Solar Wind, also made
a deposit that was commingled with FilmWest’s in the same Merrill Lynch account.
Trojan, too, sought to reclaim its deposit. Shortly thereafter, Merrill Lynch moved to
convert the New Mexico Action into an interpleader and, as the stakeholder, to deposit
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the account proceeds into court. It did so after its motion was granted in November 2009,
leaving Trojan and FilmWest to fight among themselves on the proper allocation of the
remaining funds, which had been significantly depleted.
FilmWest had, however, fairly quickly come to believe that Merrill Lynch was not
merely an innocent stakeholder serving as custodian over the deposited funds, but a
culpable party itself. That belief was based on the actions of two Merrill Lynch
employees, Robin Brubacher and Lawrence Bellmore, in allegedly facilitating Solar
Wind deals and mishandling the deposits. On August 17, 2009, FilmWest filed the
instant action in the Eastern District of Pennsylvania (the “Pennsylvania Action”) against
Solar Wind, Merrill Lynch, Brubacher, and Bellmore, alleging violations of the
Racketeering Influenced and Corrupt Organizations Act (“RICO”), common law fraud,
conversion, and related claims. Thereafter, and for almost two years, FilmWest was
litigating its claim vis-à-vis Trojan in New Mexico to the funds remaining in the Merrill
Lynch account, and its claim in Pennsylvania for damages as a result of a fraud that cost
it both a portion of its $200,000 deposit and the losses that emanated from being deprived
of the ability to release a successful film.
On June 2, 2011, the New Mexico action was formally dismissed, and on August
1, 2012, Merrill Lynch and Brubacher (together “ML”) moved for summary judgment in
the Pennsylvania Action, arguing that the common law principle of res judicata warranted
its dismissal. FilmWest argued, in response, that ML had not proved res judicata and
that, even if it had, ML acquiesced to proceeding in Pennsylvania, even as it was also
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proceeding in New Mexico, without objecting to claim-splitting in a timely manner. On
October 5, 2012, the District Court granted ML’s motion.
The primary questions on appeal are whether, when the New Mexico Action was
terminated, res judicata would have barred the Pennsylvania Action and, if so, whether
ML had waived its res judicata defense by having acquiesced to “claim-splitting” by
litigating, for as long as it did, some claims arising out of the Solar Wind transaction in
New Mexico, and others in Pennsylvania. We conclude that what otherwise would have
been a successful defense on the ground of res judicata was waived by ML. We,
therefore, will vacate the order of October 5, 2012, and remand for further proceedings.1
We have jurisdiction under 28 U.S.C. § 1291, and exercise plenary review of an order
granting summary judgment. See Giles v. Kearney, 571 F.3d 318, 322 (3d Cir. 2009).
“A court may grant summary judgment only when the record shows that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law.” Id. (internal quotation marks omitted).
I. Analysis
The procedural history and factual details of what is before us are not seriously
disputed, and the parties, for whom we primarily write, are familiar with both. We need
not, therefore, reprise that procedural and factual background beyond what we have just
1
FilmWest was eager to appeal the October 5, 2012 order but a claim against Bellmore
remained open. Ultimately, FilmWest moved for summary judgment against itself and in
favor of Bellmore, and, on July 1, 2013, that motion was granted. Bellmore has not
appeared in this action, and FilmWest, not surprisingly, does not press its appeal as to
him.
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set forth, and will move directly to consider ML’s defense of res judicata, and whether
that defense, if it would otherwise apply, has been waived.
A preliminary observation is in order. At the behest of the parties, the District
Court primarily applied law, as developed by the federal courts, governing the preclusive
effect of federal court and federal agency judgments (it also relied on cases applying
Pennsylvania’s law of preclusion). However, under the Full Faith and Credit Act, 28
U.S.C. § 1738, all “judicial proceedings . . . shall have the same full faith and credit in
every court within the United States . . . as they have by law or usage in the courts of” the
state from which they emerged. “Section 1738 requires federal courts to give the same
preclusive effect to state court judgments that those judgments would be given in the
courts of the State from which the judgments emerged.” Kremer v. Chem. Const. Corp.,
456 U.S. 461, 466 (1982). Thus, “[t]o determine the effect of a [New Mexico] court
judgment, we are required to apply [New Mexico’s] claim- and issue-preclusion law.” R
& J Holding Co. v. Redevelopment Auth. of Montgomery, 670 F.3d 420, 426 (3d Cir.
2011).
Under New Mexico’s law of preclusion, a final judgment on the merits will bar a
subsequent lawsuit if the following elements are met: “‘1) the parties must be the same or
in privity; 2) the subject matter must be identical; 3) the capacity or character of persons
for or against whom the claim is made must be the same; and 4) the same cause of action
must be involved in both suits.’” DeFlon v. Sawyers, 139 N.M. 637, 640 (2006), quoting
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Myers v. Olson, 100 N.M. 745, 747 (1984). See also Strickland v. City of Albuquerque,
130 F.3d 1408, 1411 (10th Cir. 1997) (applying New Mexico law).2
FilmWest argued to the District Court that the order dismissing the New Mexico
Action was not on the merits; that the parties in the two actions were neither identical nor
in privity;3 and that the interpleader in New Mexico was a different cause of action from
the Pennsylvania Action. Its unsuccessful arguments on the first two points have not
been reraised on appeal. Our focus, then, is exclusively on whether the New Mexico and
Pennsylvania Actions involved “different” causes of action. They did not.
Interpleaders are by their nature different from tort suits. Interpleaders are actions
in equity and not law, as they seek the injunctive relief of releasing a disputed res, and
not damages for wrongdoing. The stakeholder in an interpleader—Merrill Lynch in this
case—typically remains a disinterested party completely removed from the tort and
contractual claims bearing on the proper allocation of the res. Once the stakeholder
deposits the disputed funds into court, it is, practically speaking, out of the litigation
entirely, even if it remains a nominal defendant.
It is not clear, however, how those differences bear on the “sameness” or the
identity of the two actions for res judicata purposes. Under New Mexico law, the
“identity” in question is a “transactional” or event-based identity: a previously-litigated
2
Federal preclusion law imposes the same requirements, with the exception of the
requirement that the subject matter in both suits be the same. See In re Mullarkey, 536
F.3d 215, 225 (3d Cir. 2008). The subject matter requirement is a unique feature of New
Mexico law.
3
Only FilmWest Productions LLC was a named plaintiff in the New Mexico Action.
Also, Brubacher was not a party to the New Mexico Action, but her employer, Merrill
Lynch, of course, was.
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cause of action is, for the purposes of applying res judicata, “identical” to a present one if
the “transaction from which it arose” is the same. Myers v. Olson, 100 N.M. at 747; see
also Strickland, 130 F.3d at 1411.4 Adopting preclusion law from the Second
Restatement of Judgments, the Supreme Court of New Mexico has expressly rejected the
notion that past proceedings must have litigated the same “legal theories” as a current
proceeding in order to bar litigation of the current proceeding. See Myers, 100 N.M. at
747-48 (“[A] cause of action is to be viewed in the context of the transaction from which
it arose without regard to the various legal theories that may be available to the parties. A
claim is essentially equated with the transaction from which it springs.”).
The term “transaction” refers to a “‘factual grouping,’” defined by “‘relat[ions] in
time, space, origin, or motivation.’” Id. at 748 (quoting Restatement (Second) of
Judgments § 24); see also Strickland, 130 F.3d at 1411. To determine whether two
causes of action arise out of the same transaction, courts must be “‘pragmatic[],’” and
consider whether the two factual groupings underlying each lawsuit “‘form a convenient
trial unit, and whether their treatment as a unit conforms to the parties’ expectations or
business understanding or usage.’” Myers, 100 N.M. at 748 (quoting Restatement
(Second) of Judgments § 24).
The upshot of applying a transactional approach to determining the identity of two
causes of action is that a judgment can have preclusive effect in a subsequent action even
4
The federal law of preclusion also employs a transactional approach to res judicata, as
the District Court properly found. See Davis v. U.S. Steel Supply, Div. of U.S. Steel
Corp., 688 F.2d 166, 171 (3d Cir. 1982) (en banc) (“Rather than resting on the specific
legal theory invoked, res judicata generally is thought to turn on the essential similarity of
the underlying events giving rise to the various legal claims. . . .”).
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if the issues raised in the subsequent action were not actually previously litigated.
Claims that could have been raised in the first action are barred, so long as the first action
arose out of the same transaction. See Strickland, 130 F.3d at 1412 (“The fact that
plaintiff’s federal claims attempt to vindicate interests or obtain remedies other than those
pursued or made available under [a state procedure] does not make the prior action . . .
different. . . .”). “‘[T]he law of res judicata now reflects the expectation that parties who
are given the capacity to present their “entire controversies” shall in fact do so.’” Id. at
1411 (quoting Restatement (Second) of Judgments § 24 cmt. a).
In summary, under New Mexico law, a judgment on the merits of a first action
will preclude a second action if the second action (1) arises out of the same underlying
events, and (2) the claims raised in the second action could have been brought in the first
one.
The New Mexico Action and the Pennsylvania Action plainly arose from the same
“factual grouping” or transaction: the attempt to finance the production of Metcalf’s film
through the Solar Wind Film Fund. The pleadings in both cases demonstrate this fully:
both cases turned on Solar Wind’s false promises, Merrill Lynch’s mishandling of the
deposit, and the representations of its employees Brubacher and Bellmore. It is no
surprise, then, that the District Court concluded that FilmWest’s “claims in this case do
arise from the same transaction or occurrence that gave rise to the claims in the New
Mexico [A]ction.” (A29.)
FilmWest insists that that finding was in error, arguing that “[t]he sole claim” in
New Mexico “was an interpleader in equity,” while “the sole suit” in which FilmWest
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“asserted any causes of action for damages against Merrill Lynch is the case at bar.”
(Appellants’ Br. at 18) (emphasis omitted). True as that statement may be, it does not
address the type of similarity at issue for the purpose of determining res judicata. It does
not matter that the claims involved in the New Mexico Action invoked a different body
of law and sought different relief, because res judicata as the New Mexico courts would
apply it depends on the factual overlap giving rise to the two suits, and not on the
“various legal theories” advanced based on those facts. Myers, 100 N.M. at 748.
While FilmWest attempts to cast the New Mexico Action as transactionally
distinct from the Pennsylvania Action, that attempt collapses into the first, unavailing,
argument that the actions are different because they involve different legal claims.
FilmWest asserts that it did not “[c]omplain” of any act by Merrill Lynch in the New
Mexico Action, and that the “[s]ole relevant fact as against Merrill Lynch” in the New
Mexico Action was that Merrill Lynch was, in fact, the stakeholder of the Film Fund.
(Appellants’ Br. at 24-25.) But in its answer to Merrill Lynch’s interpleader
counterclaim in New Mexico, FilmWest did mention that Merrill Lynch mishandled its
deposit and lied about the deposit’s status. It simply decided not to seek damages against
Merrill Lynch in New Mexico for those acts (unlike Trojan, which did assert affirmative
claims of relief against Merrill Lynch in New Mexico). Instead, FilmWest assembled its
fairly loose allegations about Merrill Lynch’s misconduct, and, adding some detail,
crafted more cohesive claims of fraud in Pennsylvania. That decision in no way altered
the “factual grouping” underlying the lawsuits: both concerned the same $200,000
deposit handled by the same bank and made pursuant to the same Film Fund deal.
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FilmWest argues that even if both actions arose out of the same transaction, it
could not possibly have brought its fraud claims against ML in New Mexico because the
“jurisdiction [of an interpleader] is limited to the amount actually deposited by the
stakeholder.” (Appellants’ Br. at 34) (emphasis omitted).
To be sure, “[c]laims are not precluded . . . where a plaintiff could not seek a
certain relief or rely on a certain theory in the first action due to limitations on the subject
matter jurisdiction of the first tribunal.” State ex rel. Martinez v. Kerr-McGee Corp., 120
N.M. 118, 122 (1995) (citing Restatement (Second) of Judgments § 26(1)(c)). But
nothing prohibited the New Mexico court presiding over the interpleader from hearing
and determining tort claims against Merrill Lynch or its agents. Indeed, the three New
Mexico cases cited to us by FilmWest as being on point plainly state that a defendant
may file claims against the stakeholder in an interpleader action—and Trojan did—even
if those claims seek damages in addition to the defendant’s entitlement to the res in the
stakeholder’s custody. See Johnston v. Sunwest Bank of Grant Cnty., 116 N.M. 422, 426
(1993); Bank of New York v. Reg’l Hous. Auth. for Region Three, 138 N.M. 389, 395
(N.M. Ct. App. 2005); Traveler’s Ins. Co. v. Montoya, 90 N.M. 556 (N.M. Ct. App.
1977). There is, therefore, significant authority under New Mexico law that permits
claimants to file suit against the stakeholder in an interpleader action—and some
authority, via Montoya, for the position that a claimant is required to bring such claims.5
5
FilmWest also points us to Gaines v. Sunray Oil, 539 F.2d 1136 (8th Cir. 1976), a case
that (1) does not apply New Mexico law, (2) is inapposite, and (3) has been held to be
inapposite by its own circuit in Wayzata Bank & Trust v. A&B Farms, 855 F.2d 590 (8th
10
Thus, under New Mexico’s law of preclusion, res judicata would bar the
Pennsylvania action unless ML waived that defense by acquiescing to simultaneously
proceeding with the two actions. While, to be sure, res judicata is a powerful defense, it
is not without its limits:
[T]he general rule . . . does not apply to extinguish the claim, and part or all
of the claim subsists as a possible basis for a second action by the plaintiff
against the defendant [where] . . . [t]he parties have agreed in terms or in
effect that the plaintiff may split his claim, or the defendant has acquiesced
therein[.]
....
Where the plaintiff is simultaneously maintaining separate actions based
upon parts of the same claim, and in neither action does the defendant make
the objection that another action is pending based on the same claim,
judgment in one of the actions does not preclude the plaintiff from
proceeding and obtaining judgment in the other action. The failure of the
defendant to object to the splitting of the plaintiff’s claim is effective as an
acquiescence in the splitting of the claim.
Concerned Residents of Santa Fe N., Inc. v. Santa Fe Estates, Inc., 143 N.M. 811, 818-19
(N.M. Ct. App. 2008) (quoting Restatement (Second) of Judgments §§ 24, 26(1) & 26(1)
cmt. a).
FilmWest invoked the waiver exception before the District Court, citing both
Santa Fe Estates and R & J Holding Co., 670 F.3d at 428, a case from our court that
applied Pennsylvania law but, like Santa Fe Estates, also drew heavily from the
Restatement. The District Court found that
ML . . . did not acquiesce to Plaintiffs’ claim-splitting. When FilmWest
filed a Motion to Dismiss in the New Mexico action containing mention of
Cir. 1988), and E. Minerals & Chems. Co. v. Mahan, 225 F.3d 330 (3d Cir. 2000), a
wholly inapposite federal bankruptcy case.
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re-filing the case in Pennsylvania, Merrill Lynch responded that “[t]he
Court should resolve the competing claims in this single forum . . . rather
than allow FilmWest to further forum shop and engage in duplicative and
piecemeal litigation in additional jurisdictions” and FilmWest’s Motion to
Dismiss was ultimately withdrawn. Instead of moving the entire case to
Pennsylvania as was originally planned, Plaintiffs merely filed a second
action and pursued both simultaneously, thereby assuming the risk that the
conclusion of one of the actions could have preclusive effect on the other.
The ML defendants then moved for dismissal based on res judicata within a
reasonable time after the dismissal of the New Mexico case.
(A30-31.) (alteration in original) (citation omitted).
We conclude that the courts of New Mexico would not agree. Of those two
purported “objections” by ML, the first occurred far too early, and the second far too late.
Indeed, the first objection was not an objection to splitting anything. As the District
Court noted, it was lodged before the Pennsylvania Action was even filed, and in
response to FilmWest’s motion to dismiss the New Mexico Action altogether. At no point
in that motion to dismiss did FilmWest raise the prospect of litigating some claims in
New Mexico and others in Pennsylvania. It merely sought the effective transfer of all of
its claims from New Mexico to Pennsylvania. That transfer, and not split litigation, is all
that ML opposed.6
Even if we were to construe ML’s first objection as an objection to claim-splitting,
its actions from that point until the entry of judgment in the New Mexico Action indicate
6
Because it came before the Pennsylvania Action was filed, ML’s response to
FilmWest’s motion to dismiss plainly was inadequate under New Mexico law. To
preserve its res judicata defense, a defendant must object, in at least one of the two
actions, “that another action is pending based on the same claim.” Concerned Residents,
143 N.M. at 819 (emphasis added) (quoting Restatement (Second) of Judgments § 26
cmt. a). But when ML filed its response, there was no other action pending based on the
same claim; indeed, FilmWest had not even suggested litigating its dispute with ML in
two separate forums.
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something completely different. Once the Pennsylvania Action was filed, ML engaged in
considerable litigation activity, for almost two years, without objecting to the parallel
actions. During that time, ML had every opportunity to move to dismiss or to enjoin the
Pennsylvania Action on the ground that it was duplicative, or seek to transfer it to New
Mexico. But ML did no such thing. Before the New Mexico Action was terminated,
ML’s motions to dismiss raised only arguments opposing the merits of FilmWest’s
claims. And ML received the only transfer it ever requested, which was from the Eastern
District to the Middle District of Pennsylvania—not to New Mexico. Thus, at best, ML
initially preserved its res judicata defense, only to waive it after the split claims took
shape. See Concerned Residents, 143 N.M. at 822 (although defendant asserted res
judicata as a defense in an answer, its subsequent “vigorous participation in both actions
without objection for more than a year” constituted acquiescence) (internal quotation
marks omitted).
Only after the New Mexico Action ended in June of 2011 did ML clearly object to
claim-splitting, but that was by asserting, for the first time, res judicata as a defense to the
Pennsylvania Action. That objection plainly arrived too late, as it came at a time after
FilmWest could change course. The District Court found it significant that ML asserted
res judicata “within a reasonable time after the dismissal of the New Mexico case.”
(A31.) But that reasoning confuses the nature of the objection—the objection is to claim-
splitting—with the nature of an assertion of res judicata, which is quite different. And
under New Mexico law, a defendant must object “at the earliest feasible point.”
Concerned Residents, 143 N.M. at 822 (“If a defendant sees two actions as detrimental to
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the defendant’s interests, it should be incumbent on the defendant to specifically attack
the claim-splitting by obtaining court relief at the earliest feasible point.”). There is no
evidence either that ML ever saw the two actions as detrimental to it in any way, much
less that almost two years after the Pennsylvania Action was filed was the “earliest
feasible point” to seek court relief. And, again, a defendant’s objection to claim-splitting
must come while both actions are pending. Only then can the doctrine of waiver
discourage what one case called the “unsavory tactical maneuver[]” of abandoning an
agreed-upon method of resolving legal claims to deprive a plaintiff the opportunity to
litigate claims it thought it could press in a separate action. Matter of Super Van Inc., 92
F.3d 366, 371 (5th Cir. 1996). See also Concerned Residents, 143 N.M. at 821
(discussing the importance of providing plaintiffs with “fair notice” of the possibility of
claim preclusion).
This certainly appears to be a case in which ML invoked res judicata to upend
what appeared to be the understood, though perhaps wasteful, method of resolving a
multi-faceted legal dispute. But under New Mexico law, a defendant cannot engage in
extensive, split litigation without objection, and still preserve its res judicata defense.
IV. Conclusion
The order of October 5, 2012 will be vacated, and this matter remanded for further
proceedings.
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