Sewell v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

United States Court of Appeals,

Eleventh Circuit.

No. 95-4354.

Robert C. SEWELL, Sr., Plaintiff-Appellant,

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Nora A. Barnes,
Defendants-Appellees.

Sept. 13, 1996.

Appeal from the United States District Court for the Southern
District of Florida. (No. 94-8208-CIV-KLR), Kenneth L. Ryskamp,
Judge.

Before COX and BARKETT, Circuit Judges, and BRIGHT*, Senior Circuit
Judge.

BRIGHT, Circuit Judge:

In late 1993, Robert Clayton Sewell, Sr., submitted claims for

arbitration to the National Association of Securities Dealers, Inc.

(NASD) against his financial broker Merrill Lynch, Pierce, Fenner

& Smith, Inc. (Merrill Lynch) and its agent Nora A. Barnes

(Barnes). These claims included fraud and mismanagement of his

account by the brokerage company. Merrill Lynch never responded in

any way or submitted its defenses to arbitration, but instead

petitioned a New York state court for a judgment permanently

staying as ineligible for arbitration Sewell's claims. The New

York state court entered a default judgment against Sewell after he

failed to appear. Sewell then brought essentially the same claims

of fraud and mismanagement in Florida state court. Merrill Lynch

removed the case to federal court in the Southern District of

*
Honorable Myron H. Bright, Senior U.S. Circuit Judge for
the Eighth Circuit, sitting by designation.
Florida. Determining that Sewell's claims were barred by the

doctrine of res judicata, the district court granted summary

judgment of dismissal in favor of Merrill Lynch. Sewell appeals.

We conclude Sewell's claims are not barred by res judicata and

reverse and remand to the district court for further proceedings.

I. BACKGROUND

In December 1984, Sewell sold his farm for approximately

$806,000 and opened a cash management account with Merrill Lynch.

Barnes had encountered Sewell at a financial seminar sponsored by

Merrill Lynch and became his financial consultant. A document

which Merrill Lynch gave Sewell stated that Sewell's investment

objective was "longterm" "income" from "good quality" investments.

Although Merrill Lynch alleges that Sewell entered into a customer

agreement with them at the time he opened his cash management

account, Sewell filed an affidavit stating that he does not

remember signing any such document, and the company acknowledges it

has been unable to locate a signed customer agreement. Merrill

Lynch alleges that the customer agreement provided that any

controversies arising as a result of the business relationship

between Sewell and Merrill Lynch must be submitted to arbitration.1

1
Merrill Lynch alleges the document read in part:

Except to the extent that controversies involving
claims arising under the Federal securities laws may be
litigated, it is agreed that any controversy between us
arising out of your business or this agreement shall be
submitted to arbitration conducted under the provisions
of the Constitution and Rules of the Board of Governors
of the New York Stock Exchange, Inc. or pursuant to the
Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc., as the
undersigned may elect.
 In June 1993, Sewell voluntarily commenced NASD arbitration

proceedings against Merrill Lynch and Barnes, alleging claims based

on fraud, breach of fiduciary duty, negligent supervision, and for

an accounting, resulting from Sewell's investment in several

limited partnerships between 1985 and 1987. Along with his claim

statement, Sewell filed a submission agreement which stated that

"[t]he undersigned parties hereby submit the present matter in

controversy, as set forth in the attached statement of claim ... to

arbitration in accordance with the Constitution, Bylaws, Rules,

Regulations and/or Code of Arbitration Procedure of the [NASD]."

Merrill Lynch did not sign the submission agreement or appear

in any arbitration proceedings with the NASD. Instead as we have

observed, Merrill Lynch brought suit in the Supreme Court of New

York in February 1994. Merrill Lynch sought to stay the NASD

arbitration, arguing Sewell's claims did not qualify for

arbitration under the NASD Code of Arbitration § 15. Section 15

provides that no dispute, claim or controversy shall be eligible

for submission to arbitration under the code where six years have

elapsed from the occurrence or event giving rise to the act or

dispute, claim or controversy. Merrill Lynch attached a standard

customer agreement to its petition, and a 1994 affidavit from a

former administrative manager who attested that customer agreements

are mandatory at Merrill Lynch for any person opening an account

and that he recalled seeing copies of the customer and cash

management account agreements executed by Sewell.

Merrill Lynch asked the New York court to enter judgment

permanently staying and dismissing Sewell's "untimely" claims.
Merrill Lynch cited numerous New York and federal court decisions

holding that section 15 is a "jurisdictional eligibility

requirement," rather than a limitations period, which must be

measured from the date of the claimant's investment, and cannot be

tolled by allegations of fraudulent concealment. See Edward D.

Jones & Co. v. Sorrells, 957 F.2d 509, 512-14 (7th Cir.1992); see

also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d

381, 383-84 (11th Cir.1995) (section 15 is substantive

jurisdictional eligibility requirement).

Sewell did not appear in the case because he agreed that

section 15 would preclude him from arbitrating his claims. In

March 1994, the New York state court entered a one-page default

judgment in favor of Merrill Lynch. The order granted Merrill

Lynch's petition "on default permanently staying arbitration

commenced by respondent against petitioner."

Sewell immediately filed a complaint in Florida state court.

He alleged that after opening an account, Barnes recommended and

sold Sewell approximately $450,000 in ML Media Partners LP and

Delphi Film Associates IV LP, two non-liquid communications or

entertainment industry companies with no real secondary market. He

alleged Barnes began placing his account on margin by causing

Merrill Lynch to loan him money using as collateral the securities

and money in his account and effecting trades without his knowledge

or consent. This process allowed Barnes and Merrill Lynch to

generate more commissions in trading activity as the amount of

money available had increased by the amount of money Merrill Lynch

had loaned Sewell. Sewell alleged these actions were taken at a
time when Barnes and Merrill Lynch knew that Sewell's judgment was

impaired and he was suffering from alcoholism and the resultant

mental and physical difficulties.2

Sewell claimed that Merrill Lynch and Barnes made false

representations regarding the limited partnership interests as to

their value and risk, mailed to him false monthly statements

concerning their value, and effected excessive transactions in his

account for the purpose of generating commissions. He claimed that

Merrill Lynch and Barnes defrauded and breached their fiduciary

duty to him under Florida state law, that Merrill Lynch was

negligent in supervising and retaining Barnes, and that their

statements and actions constituted an "enterprise" under Florida

law. He asked for damages and an accounting.

On removal of the case to federal district court, Merrill

Lynch moved to dismiss Sewell's claims and, alternatively, for

summary judgment. Merrill Lynch and Barnes contended that Sewell's

action was barred because 1) Sewell's sole remedy was arbitration

and section 15 barred his claims from arbitration, and 2) the

ruling of the New York court acted as res judicata and precluded

Sewell from litigating his claims in Florida. They attached

documents from the proceeding, particularly the affidavit filed in

that case suggesting that Sewell must have signed a customer

agreement limiting his remedy to arbitration. Sewell responded by

2
In fact, Barnes testified in Sewell's state mental
competency proceeding in 1988 that when she spoke with Sewell
over the telephone his speech was slurred, he was unable to
answer simple questions such as where he was and what day it was,
and he was unable to recall recent disbursements from his
account.
filing an affidavit stating that he did not recall ever signing

such a document.

After conducting a hearing, the district court agreed that

Sewell's claims were barred by the New York court's ruling under

the doctrine of res judicata. The district court noted default

judgments are to be given the full preclusive effect under Florida

law, citing In re Greene, 150 B.R. 282, 287 (Bankr.S.D.Fla.1993)

and In re Arguez, 134 B.R. 55, 58 (Bankr.S.D.Fla.1991). The

district court concluded that although the New York court did not

reach the merits of the case, the effect of the default judgment

barred Sewell's claims based on the arbitration agreement referred

to by Merrill Lynch in the New York case.

Apparently referring to the disputed customer agreement, the

court determined the "arbitration agreement" mandated that Sewell

submit his claims against the defendants to arbitration—claims

nonetheless precluded from arbitration by section 15 of the NASD

Code of Procedure. The court concluded Sewell could have litigated

his claims in New York, but chose to ignore the proceeding. Thus

the default precluded him from relitigating his claims in Florida

courts. In light of its holding that Sewell's claims were barred

under the doctrine of res judicata, the district court concluded it

did not have to determine whether Sewell actually entered into an

arbitration agreement with Merrill Lynch in the customer agreement.

Sewell appeals. We reverse.

II. DISCUSSION

The application of res judicata principles to Sewell's claims

constitutes a pure question of law which this court reviews de
novo. Aquatherm Indus., Inc. v. Florida Power & Light Co., F.3d
84

1388, 1391 (11th Cir.1996). The term "
res judicata " has been used

to refer to both claim preclusion and to issue preclusion, although

the term is more often synonymous with claim preclusion rather than

issue preclusion or collateral estoppel. See id. at 1391 n. 1. 3

This case concerns both claim and issue preclusion. Merrill Lynch

argues 1) that principles of res judicata preclude Sewell's claims,

and 2) that the New York state court judgment precludes litigation

of the issue of whether Sewell signed a customer agreement. We

disagree on both counts.

First, under Florida law, res judicata bars a second suit

when a court of competent jurisdiction has entered final judgment

in the first suit and the following four conditions are met:

identity of the thing sued for; identity of the cause of
action; identity of the parties; [and] identity of the
quality in the person for or against whom the claim is made.

Aquatherm Indus., Inc., 84 F.3d at 1394 (citing Albrecht v. State,

444 So.2d 8, 12 (Fla.1984)). Default judgments may constitute res

judicata for purposes of both claim and issue preclusion. See In

re Bush, 62 F.3d 1319, 1322-25 (11th Cir.1995).

However, "ordinarily a judgment dismissing an action or

3
Under the doctrine of res judicata, a judgment on the
merits in a prior suit bars a second suit involving the
same parties or their privies based on the same cause
of action. Under the doctrine of collateral estoppel,
on the other hand, the second action is upon a
different cause of action and the judgment in the prior
suit precludes relitigation of issues actually
litigated and necessary to the outcome of the first
action.

Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99
S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979).
otherwise denying relief for want of jurisdiction, venue, or

related reasons does not preclude a subsequent action in a court of

competent jurisdiction on the merits of the cause of action

originally involved." 1B James W. Moore, et al., Moore's Federal

Practice ¶ 0.405[5] (2d ed. 1996); see also American Nat'l Bank v.

FDIC, 710 F.2d 1528, 1535-36 (11th Cir.1983) (determining previous

action dismissed for want of subject matter jurisdiction had no res

judicata effect). If the court in which an action is brought has

no jurisdiction of the subject matter, the suit must be dismissed;

"[i]n such cases, the dismissal is not a determination of the

claim, but rather a refusal to hear it, and the plaintiff is free

to pursue it in an appropriate forum." 1B Moore's Federal

Practice, supra at ¶ 0.409[1.-2].

As Merrill Lynch noted in its pleadings, section 15 of the

NASD Code is a "jurisdictional eligibility requirement" which

precludes Sewell from arbitrating his claims with the NASD. The

New York state court did not adjudicate the merits however: it

simply dismissed and stayed the claims Sewell had submitted to

arbitration because the NASD had no jurisdiction over them. In

such a case, where the court found only that the NASD lacked

jurisdiction over Sewell's claims, the doctrine of res judicata

would not bar Sewell from bringing the claims in Florida court.4

Second, the issue of whether Sewell signed a customer

4
The United States Supreme Court "has interpreted the phrase
"lack of jurisdiction' broadly to include matters such as
preconditions to suit and other reasons not addressing the
substantive merits of the controversy." 1B Moore's Federal
Practice, supra at ¶ 0.409[1.-2] (citing Costello v. United
States, 365 U.S. 265, 81 S.Ct. 534, 5 L.Ed.2d 551 (1961)).
agreement is not settled or precluded by the New York state court

judgment. Although Merrill Lynch pleaded the existence of such an

agreement in New York state court, that issue was unnecessary to

the court's determination that section 15 barred Sewell's claims

from arbitration as untimely. The issue before the New York court

was whether Sewell could proceed in arbitration, rather than

whether Sewell was required to proceed in arbitration. Sewell

could have presented his claims for arbitration either under a

customer agreement providing for doing so or under general NASD

Bylaws which require member firms such as Merrill Lynch to

arbitrate if so requested by a customer. Sewell's arbitration

pleadings did not state under which circumstance he was voluntarily

bringing his action.

The existence of a customer agreement thus was immaterial and

unnecessary to the issues determined by the New York state court

judgment. See Mike Smith Pontiac, GMC, Inc. v. Mercedes-Benz of N.

Am., 32 F.3d 528, 532 (11th Cir.1994) (in Eleventh Circuit,

collateral estoppel applies where issue at stake identical to issue

alleged in prior litigation, issue actually litigated in prior

litigation, and determination of issue in prior litigation critical

and necessary part of judgment in earlier action), cert. denied, --

- U.S. ----, 116 S.Ct. 702, 133 L.Ed.2d 659 (1996); Parker v.

McKeithen, 488 F.2d 553, 557 (5th Cir.1974) (well settled law

establishes that fact decided in earlier suit is conclusively

established between parties provided it was necessary to result in

first suit); see also In re Arguez, 134 B.R. 55, 58

(Bankr.S.D.Fla.1991) (in Florida, default judgment conclusively
establishes between parties truth of all material allegations in

complaint in first action and every fact necessary to uphold

default judgment) (emphasis added). Because the existence of a

customer agreement between the parties did not necessitate a

determination in the New York judgment, the district court erred in

concluding that res judicata precludes Sewell from disputing this

issue.

Although Merrill Lynch alleges that Sewell signed a customer

agreement providing for arbitration as an exclusive remedy, Merrill

Lynch cannot produce such a document, and Sewell disputes the

existence of such a document. Sewell's submission agreement to the

NASD did not mandate that Sewell limit himself to arbitration as an

exclusive remedy, and in any event, Merrill Lynch's necessary

signature on the agreement was never obtained. See 1B Moore's

Federal Practice, supra at ¶ 0.405[7] ("when prior unsuccessful

litigation has established that one remedy is unavailable, a

litigant is not always precluded by the mistaken choice from

invoking an appropriate remedy"); Cf. Davis v. Chevy Chase

Financial Ltd., 667 F.2d 160, 167-68 (D.C.Cir.1981) (determining

party did not waive or forfeit right to judicial consideration of

arbitrability by submitting question initially to arbitrator).

Thus, there appears to be no reason Sewell cannot proceed with his

claims against Merrill Lynch in Florida courts. See Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381, 383 (11th

Cir.1995) (courts will not require parties to arbitrate if they

have not agreed to do so); 1B Moore's Federal Practice, supra at

¶ 0.405[1] (although judgment merely adjudging remedy to be barred
may operate as judgment in bar in forum that rendered it, it will

not have such operative effect in another forum whose remedial law

authorizes recovery).

The cases cited by Merrill Lynch in support of its contention

that Sewell's claims are barred are inapposite because in each case

a customer agreement or submission agreement existed providing for

arbitration as an exclusive remedy. See C.D. Anderson & Co. v.

Lemos, 832 F.2d 1097, 1098-99 (9th Cir.1987); Calabria v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 855 F.Supp. 172, 173-76

(N.D.Tex.1994); Castellano v. Prudential-Bache Secs., Inc., [1990

Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 95,321, 1990 WL 87575 (June

19, 1990).

III. CONCLUSION

We conclude the district court erred in determining that

principles of res judicata barred Sewell's claims. The issue of

whether a customer agreement exists barring litigation in favor of

arbitration remains for determination, together with other matters,

in the present litigation.

Accordingly, this case is REVERSED and REMANDED to the

district court for further proceedings.