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United States District Court, Northern District of Illinois, E. D

September 1, 1981


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


Woodstock, Inc. ("Woodstock") has moved under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss this action brought by Marvin P. and Janet Lee Smith ("Smiths") for failure to state a cause of action due to res judicata considerations. Because the matters on which Woodstock relies are not apparent on the face of Smiths' Complaint, a Rule 12(b)(6) motion is really inappropriate, 5 Wright and Miller, Federal Practice and Procedure: Civil § 1357 at 604-10. However the parties have briefed the motion in full agreement on the matters outside the Complaint to be considered by the Court, and the Court will therefore treat Woodstock's motion as the equivalent of one for summary judgment. Moch v. East Baton Rouge Parish School Board, 548 F.2d 594, 596 n. 3 (5th Cir. 1977). For the reasons stated in this memorandum opinion and order Woodstock's motion is granted.


Smiths charge Woodstock*fn1 with having misrepresented various matters relating to the establishment of a discretionary commodities futures trading account for Smiths' benefit. Smiths' investments aggregating $65,000 in the account ended up with a value of $4,000 on liquidation. Smiths assert claims for common law fraud, Commodities Exchange Act violations, churning, breach of contract and breach of fiduciary duties. All the claims other than the Commodities Exchange Act claims are brought under the Court's diversity jurisdiction and (inappropriately) pendent jurisdiction as well.

All the underlying facts alleged by Smiths were the subject of a prior action in the United States District Court for the Northern District of California (No. C-77-2384-CFP), brought by Smiths against Woodstock, Boe and Sidney Becker (Woodstock's President). In the California actions Smiths relied on the identical facts to assert nine counts of claimed securities law violations and three counts (breach of fiduciary duties, common law fraud and churning) labeled as pendent jurisdiction counts. It is critical to note that jurisdiction of the California District Court over the last three counts could have been asserted on diversity grounds, just as are the non-Commodities Exchange counts before this Court.*fn2

Smiths' California action has had a checkered history, having involved an aborted appeal to the Court of Appeals for the Ninth Circuit (no Rule 54(b) determination having been made when summary judgment was granted in favor of Woodstock and Becker but not in favor of Boe). On May 15, 1981 the California District Court denied Smiths' motion to set aside and revise the summary judgment order and to file a Third Amended Complaint there.*fn3 Thus the summary judgment in favor of Woodstock against Smiths remains a final adjudication.

Res Judicata

Late in its last term the United States Supreme Court again made plain — as this Court had always assumed — that the doctrine of res judicata applies in federal courts with full force. In Federated Department Stores, Inc. v. Moitie, ___ U.S. ___, ___, 101 S.Ct. 2424, 2427, 69 L.Ed.2d 103 (1981) it repeated the standard articulation of the doctrine:

  There is little to be added to the doctrine of
  res judicata as developed in the case law of this
  Court. 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. Commissioner v. Sunnen,
  333 U.S. 591, 597, 68 S.Ct. 715, 719, 92 L.Ed. 898
  (1948); Cromwell v. County of Sac, 94 U.S. 351,
  352-353, 24 L.Ed. 195 (1877).

Also significantly for the present case, it specifically rejected the effort of the Court of Appeals for the Ninth Circuit to create an equitable "public policy" or "simple justice" exception to res judicata principles.

Accordingly the first question for this Court is whether the California District Court's summary judgment in favor of Woodstock and against Smiths was a judgment "on the merits." In that respect last week's decision in Harper Plastics makes the answer crystal clear: It was. As the Court put it in Harper Plastics, at 943:

  For the purposes of res judicata, the definition of
  a judgment on the merits is one which "is based on
  legal rights as distinguished from mere matters of
  practice, procedure, jurisdiction, or form."
  Fairmont Aluminum Co. v. Comm'r, 222 F.2d 622 (4th
  Cir.), cert. denied, 350 U.S. 838 [76 S.Ct. 76,
  100 L.Ed. 748] (1955). Traditionally, a judgment is
  on the merits if it completely disposes of the
  underlying cause of action, Cromwell v. County of
  Sac, 94 U.S. 351 [24 L.Ed. 195] (1877), or

  determines that the plaintiff has no cause of
  action, Restatement of the Law of Judgments § 49,
  comment a at 193 (1942). Its effect is that of an
  absolute bar to a subsequent action. Weston Funding
  Corp. v. Lafayette Towers, Inc., 550 F.2d 710, 713
  (2d Cir. 1977). A more modern view includes not
  only those judgments based on legal rights, but
  extends to dismissals on other than traditionally
  substantive grounds. See Fed.R.Civ.P. 41(b);
  Reporter's Note, Restatement (Second) of Judgments
  § 48, at 42-43. Indeed, the Restatement (Second) of
  Judgments dispenses with the "on the merits"
  terminology "because of its possibly misleading
  connotations." Restatement (Second) of Judgments, §
  48 at 36 (Tent. Draft No. 1 1973).

That analysis, and the result it compels, serve the purposes that underlie the res judicata doctrine. Smiths had ample opportunity to assert in their California lawsuit every claim now urged in their present Complaint. Indeed Judge Orrick stated in denying Smiths' motion to add identical claims (May 15, 1981 Tr. 10):*fn4

  Because even though it was not clear whether a
  private action under the Commodities Act was
  available at the time the plaintiffs filed their
  Second Amended Complaint, there's no question but
  that they could have brought that action in the
  same manner that other plaintiffs in similar
  positions have done when they've pleaded
  violations of both the Securities Act and the
  Commodities Act. . . .

  In this case it appears to me there was ample
  opportunity for the plaintiffs to have raised the
  legal claims that they now seek to state; and
  they've offered no excuse for not doing so.

It is quite irrelevant that dismissal of the three common law claims by the California District Court was attributable to the fact that Smiths were there assertedly relying on pendent jurisdiction, so that the merits of those counts were not examined by the California courts. Instead the controlling fact for res judicata purposes is that the nine federal jurisdiction counts (the claimed securities law violations) were disposed of "on the merits" (a fact so clearly established by the principles stated earlier that it is contested nowhere in Smiths' memorandum). Such disposition bars all claims raised or that "could have been raised in that action." And there is no question that the common law claims "could have been raised" in the California District Court, grounded on diversity jurisdiction.*fn5

Though the Court of Appeals in Harper Plastics did not follow the "on the merits" locution employed in Federated, its characterization of what plaintiff sought to do in Harper Plastics is equally applicable here at 945:

  As a corollary to the general rule, res judicata
  operates to bar litigation of matters that should
  have been raised in the prior proceeding. The prior
  judgment is conclusive "not only in respect of
  every matter which was actually offered and
  received to sustain the demand or to make out a
  defense, but also as to every ground of recovery or
  defense which might have been presented." Mendez v.
  Bowie, 118 F.2d 435, 440 (1st Cir.), cert.
  denied, 314 U.S. 639, 62 S.Ct. 76, 86 L.Ed. 513

  This application of the doctrine of res judicata
  operates to prevent the splitting of a single cause
  of action and the use of several grounds for
  recovery under the same action as the basis for
  separate suits. Id. An unsuccessful party may not,
  therefore, frustrate the doctrine of res judicata
  by cloaking the same cause of action in the
  language of a theory of recovery untried in the
  previous litigation.

Lambert v. Conrad, 536 F.2d 1183 (7th Cir. 1976). All of Smiths' theories of recovery, whether tried in the previous litigation, offered in the previous litigation or offered afresh in this action (and in the motion to amend in the California litigation) represent splits of a single cause of action. Res judicata prohibits that splitting process.

Only one question remains for discussion. Woodstock's counsel did state at the time Smiths' last motion was before the California District Court that "counsel isn't really losing any other possible claim he might have; he can raise them in the other two lawsuits his clients have" (May 15, 1981 Tr. 7). That poses the question whether estoppel or some equivalent notion should preclude the application of res judicata — which would certainly operate with full vigor but for Woodstock's counsel's statement. Two factors prevent any change in the result for that reason:

    (1) Smiths' counsel specifically apprised Judge
  Orrick of the res judicata claim being asserted
  by Woodstock, thus urging the importance of
  preserving their claims by an amendment to the
  California complaint. As reflected by Judge
  Orrick's language quoted earlier in this opinion,
  his decision was not based on the continuing
  availability of the claim in this proceeding, but
  rather on Smiths' failure to show any justification
  for not having raised the claims earlier in the
  California action.

    (2) Federated rejected the Court of Appeals'
  effort to raise equitable principles above the
  established doctrine of res judicata (101 S.Ct. at

    But we do not see the grave injustice which
    would be done by the application of accepted
    principles of res judicata. "Simple justice" is
    achieved when a complex body of law developed
    over a period of years is evenhandedly applied.
    The doctrine of res judicata serves vital
    public interests beyond any individual judge's
    ad hoc determination of the equities in a
    particular case. There is simply "no principle
    of law or equity which sanctions the rejection
    by a federal court of the salutary principle of
    res judicata." Heiser v. Woodruff, 327 U.S. 726,
    733, 66 S.Ct. 853, 856, 90 L.Ed. 970 (1946). The
    Court of Appeals' reliance on "public policy" is
    similarly misplaced. This Court has long
    recognized that "[p]ublic policy dictates that
    there be an end of litigation; that those who
    have contested an issue shall be bound by the
    result of the contest, and that matters once
    tried shall be considered forever settled as
    between the parties." Baldwin v. Traveling Men's
    Association, 283 U.S. 522, 525, 51 S.Ct. 517,
    518, 75 L.Ed. 1244 (1931). We have stressed that
    "the doctrine of res judicata is not a mere
    matter of practice or procedure inherited from a
    more technical time than ours. It is a rule of
    fundamental and substantial justice, `of public
    policy and of private peace,' which should be
    cordially regarded and enforced by the court."
    Hart Steel Co. v. Railroad Supply Co.,
    244 U.S. 294, 299, 37 S.Ct. 506, 507, 61 L.Ed. 1148
    (1917). The language used by this Court half a
    century ago is even more compelling in view of
    today's crowded dockets:

    "The predicament in which respondent finds
    himself is of his own making . . . we cannot be
    expected, for his sole relief, to upset the
    general and well-established doctrine of
    res judicata, conceived in the light of the maxim
    that the interest of the state requires that
    there be an end to litigation — a maxim which
    comports with common sense as well as public
    policy. And the mischief which would follow the
    establishment of precedent for so disregarding
    the salutary doctrine against prolonging strife
    would be greater than the benefit

    which would result from relieving some case of
    individual hardship." Reed v. Allen, supra, 286
    U.S. [191], at 198-199, 52 S.Ct. [532], at 533
    [76 L.Ed. 1054].

Federated thus negates the overriding of res judicata — a doctrine of strong public interest — by the other "public policy" embodied in the estoppel resulting from private conduct.*fn6


This action is dismissed as to defendant Woodstock, Inc. because it is barred by res judicata. On or before September 18, 1981 Smiths' counsel are directed to apprise the Court (with a courtesy copy to Woodstock's counsel) whether they intend this action to proceed against defendant Boe and, if so, what steps they have taken in that regard.

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