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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 ...

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