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.