Higgins et al v. NMI Enterprises,Inc. et al
Filing
80
ORDER & REASONS: for the reasons stated, IT IS HEREBY ORDERED that dfts' DROR International, L.P. and Nitzan Mendelbaum's 43 Motion to Dismiss Party on the Basis of Res Judicata and Collateral Estoppel is GRANTED and such claims are DISM ISSED WITH PREJUDICE; IT IS FURTHER ORDERED that pla Wallace's claims are DISMISSED WITH PREJUDICE for failure to state a claim upon which relief may be granted. Signed by Judge Nannette Jolivette Brown on 11/30/2012. (rll, ) Modified on 11/30/2012 to edit doc type (rll, ).
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
DALE HIGGINS, et al.
CIVIL ACTION
VERSUS
NO. 09-6594
NMI ENTERPRISES, INC., et al.
SECTION: “G”(4)
ORDER AND REASONS
Before the Court is Defendants NMI Enterprises, Inc.1 (“NMI”), DROR International, L.P.
(“DROR”), and Nitzan Mendelbaum’s (“Mendelbaum”) (collectively, “Defendants”) Motion to
Dismiss on the Basis of Res Judicata and Collateral Estoppel,2 in which Defendants seek to have
this Court dismiss all claims against them. After considering the pending motion, the pleadings, the
memorandum in support, the opposition, the reply, the record, and the applicable law, for the
following reasons the Court will grant Defendants’ motion.
I. Background
A. Parties and Their Relationship
Defendant NMI is a Texas corporation and general partner of DROR. Defendant DROR is
a limited liability company in the business of magazine publishing. Defendant Mendelbaum is the
president of NMI and a limited partner of DROR.3 Defendant Laurie Felton (“Felton”) was
previously an employee of Louisiana Homes & Garden Magazine, a magazine published by
1
NMI was terminated as a party on May 13, 2011.
2
Rec. Doc. 43.
3
Rec. Doc. 43-1 at pp. 1, 5 n.1. The record reflects that DROR previously did business as NMI, who has been
terminated as a party. In addition, Mendelbaum is later referred to as the “sole member and president” of DROR. See
id; see also Rec. Doc. 50 at p. 2 (“Mr. Mendelnaum (the president and sole member of DROR)”).
Plaintiffs.4 Plaintiffs Dale Higgins (“Higgins”) and Roger Smith (“Smith”) are the sole members of
Thundervision, LLC (“Thundervision”), which is involved in the publication of magazines, namely
Louisiana Homes & Garden Magazine.5 Plaintiff Wright Avenue Associates, LLC (“Wright
Avenue”), is an original owner of Thundervision, and Higgins is Wright Avenue’s managing
partner.6 Plaintiff Melanie Wallace (“Wallace”) is an employee of Louisiana Homes & Garden
Magazine.7 Hereinafter all plaintiffs will be referred to collectively as “Plaintiffs.”
B. Prior Legal Actions
The above-captioned matter is not the first round of litigation many of these parties and
entities have pursued against one another. DROR initially brought suit against Thundervision,
Smith, Higgins, and Wright Avenue for the alleged non-payment of overdue invoices in the Twenty
Fourth Judicial District Court, State of Louisiana.8 In response, Thundervision, Smith, Higgins and
Wright Avenue filed a counterclaim alleging that two issues of “Louisiana Home & Garden
Magazine” printed by DROR were defective.9 Before trial, Thundervision filed for bankruptcy in
the United States Bankruptcy Court for the Eastern District of Louisiana. In bankruptcy court,
Thundervision sought offset of any amount owed to DROR and its employees for their alleged
4
Rec. Doc. 43-1 at p. 2.
5
Id. at p. 3.
6
Rec. Doc. 1 at pp. 1-2.
7
Rec. Doc. 43-1 at p. 3.
8
Id.
9
Id.
2
violations of the Computer Fraud and Abuse Act10 and the Wire Tap Act,11 claiming that Felton
provided Mendelbaum, in his capacity as a member of DROR, with access to Thundervision’s
business email accounts.
As a result of Thundervision’s filing for bankruptcy, DROR’s state court suit was
automatically stayed and a temporary injunction was granted in favor of Smith, Higgins, and Wright
Avenue pending trial on the merits against Thundervision in bankruptcy court, because, according
to Defendants, “issues in state court ... were identical to the issues before the bankruptcy court and
[] proceeding in both courts concurrently would not be in the interest of judicial economy.”12 The
case proceeded before Judge Elizabeth Magner in the United States Bankruptcy Court for the
Eastern District of Louisiana.13
On a motion for partial summary judgment, the bankruptcy court found Thundervision liable
on five invoices to DROR totaling $143,728.05.14 At trial, the parties contested one additional
invoice and whether Thundervision was entitled to an offset based upon its multiple claims arising
from the alleged unauthorized access of its email accounts and computers.15 At the conclusion of
trial, judgment was entered in favor of DROR concerning the disputed invoice, but that award was
offset by judgments in favor of Thundervision for DROR’s violations of the Computer Fraud and
Abuse Act and Louisiana Civil Code Article 2315, which provides a remedy for any behavior that
10
18 U.S.C. § 1030.
11
18 U.S.C. § 2510.
12
Rec. Doc. 43-1 at pp. 3-4.
13
Id. at p. 4.
14
Id.
15
Id. at p. 5.
3
causes damage to another.16 This offset was entered in favor of Thundervision for the unauthorized
access of Thundervision’s computers and email accounts, which Felton facilitated.17 DROR claims
that Thundervision’s other claims relating to the allegations of defective issues of a magazine were
“denied for want of proof.”18
After the bankruptcy proceedings, the temporary stay against Smith, Higgins, and Wright
Avenue was lifted and the state court suit resumed.19 The state court suit, however, only addressed
the remaining issue of whether Smith, Higgins, and Wright Avenue were guarantors of the contracts
entered into between DROR and Thundervision, and if they were therefore liable for their payment.
The state court proceedings did not address any alleged unlawful access to email. DROR filed a
motion for summary judgment on the issue of whether Smith, Higgins, and Wright Avenue were
guarantors of the contracts entered into between DROR and Thundervision, which was granted.
Smith, Higgins, and Wright Avenue appealed this ruling to the Louisiana Fifth Circuit Court of
Appeal.20 DROR also filed a motion for dismissal in the state court proceeding on the basis of res
judicata, “concerning only the personal guaranties issued by Mr. Smith, Mr. Higgins and/or Wright
Avenue Associates on accounts due and payable to DROR.”21 The motion was denied.
16
Id.
17
Ex. D (opinion of bankruptcy court).
18
Rec. Doc 43-1 at p. 5.
19
Id. at p. 6.
20
Id; see also Rec. Doc. 46 at p. 5.
21
Rec. Doc. 50 at p. 4.
4
C. Instant Lawsuit
The complaint in the action pending before this Court initially named Mendelbaum, DROR,
NMI, and Felton as defendants.22 Specifically, Plaintiffs allege that “Felton gave Mendelbaum,
acting as partner of DROR and president of its general partner, NMI, Smith’s e-mail password and
thereafter all defendants used that password to read Smith’s e-mails to and from the other plaintiffs
about their business and legal matters as well as those to and from his (Smith’s) attorneys [regarding
the suit against Thundervision] for alleged breach of contract by DROR and NMI.”23 The action
Plaintiffs refer to in the complaint is the state court proceeding that was eventually stayed until the
resolution of the case pending in federal bankruptcy court.24 Plaintiffs assert that the Defendants
stole Smith’s password “to facilitate a takeover of ‘Louisiana Home & Garden Magazine.’”25
Plaintiffs here seek damages pursuant to the “Computer Fraud and Abuse Act” and “The Wire Tap
Act”26 on the basis of the allegations that Defendants misappropriated Smith’s email password and
read his emails.27
On December 15, 2010, Plaintiffs filed an amended complaint, wherein they added several
more defendants and incorporated by reference against the new defendants all allegations made in
the first complaint.28 Specifically, Plaintiffs added Robert D. Reuthlinger (“Reuthlinger”), Timothy
22
Rec. Doc. 1 at p. 2. NMI has subsequently been terminated as a party.
23
Id. at p. 3.
24
Id.
25
Id.
26
18 U.S.C. § 2510
27
Rec. Doc. 1 at pp. 4-5.
28
Rec. Doc. 9.
5
A. Beeson (“Beeson”), Michael D. Harris (“Harris”), all alleged to be “shareholder[s] and/or
officer[s] and/or employee[s] of Today’s House & Garden, Inc.,” a Texas Corporation that is also
added as a defendant; and Tracie A. Begnaud (“Begnaud”).29
II. Parties’ Arguments
In the memorandum in support of the pending motion to dismiss, Defendants first allege that
Plaintiffs’ claims must be dismissed under the doctrine of res judicata.30 Defendants argue that under
the Louisiana law of res judicata, when a final judgment is “‘in favor of the defendant, all causes
of action existing at the time of final judgment arising out of the transaction or occurrence that is the
subject matter of the litigation are extinguished and the judgment bars a subsequent action in those
causes of action.’”31 Defendants continue by outlining the conditions that must be met to preclude
a second action under Louisiana law: “(1) the judgment [in the prior action] is valid; (2) the
judgment is final; (3) the parties are the same; (4) the cause or causes of action asserted in the
second suit existed at the time of final judgment in the first litigation; and (5) the cause or causes
of action asserted in the second suit arose out of the transaction or occurrence that was the subject
of the first litigation.”32
Regarding the first and second factors, Defendants assert that the United States Bankruptcy
Court for the Eastern District of Louisiana issued judgments “dated September 29, 2009, and June
29
Id. at pp. 1-2.
30
Rec. Doc. 43-1 at p. 6.
31
Id. (quoting La. Rev. Stat. § 13:4231(2)).
32
Id. (citing Burguieres v. Pollingue, 2002-1385 (La. 2/25/03); 843 So.2d 1049, 1053).
6
1, 2010, [that] are valid and final and no one appealed within the time delays permitted.”33 One of
the judgments rendered in favor of Thundervision was for violations of the Computer Fraud and
Abuse Act, arising from the unauthorized access of a Thundervision email account.34
Next, Defendants argue that “the parties to this action are substantially the same as the
parties [that were before] the Bankruptcy Court.”35 “Plaintiffs, Roger Smith, Dale Higgins and/or
Wright Avenue Associates, the non-debtor principals of Thundervision, previously brought against
DROR the exact same claims they now assert against DROR and Mr. Mendelbaum.”36 Defendants
further point out that “the only difference is that while the previous claims were brought on behalf
of Thundervision as against DROR, the instant claims are being brought by the owners of
Thundervision as against the owner of DROR.”37 Defendants claim that the addition of Melanie
Wallace as a plaintiff, “who, by her own testimony, is merely an ‘administrative assistant’ of
Thundervision,” is improper because she has no right of action against Defendants, and that her
addition is merely a “procedural tactic” to avoid the application of res judicata and an attempt by
Plaintiffs to “take two bites at the apple.”38
Regarding the fourth factor, Defendants assert that the causes of action now sought by
Plaintiffs existed at the time of the final judgment rendered in the bankruptcy proceeding.39 On
33
Id. at p. 7.
34
Id.
35
Id.
36
Id.
37
Id.
38
Id. (citing Ex. J, Deposition of Melanie Wallace). Wallace’s right of action will be discussed in greater depth
later. See infra Part III.D.
39
Id. at p. 8.
7
March 22, 2006, an investigation into Felton was initiated for the alleged unauthorized access of
Thundervision’s business email accounts. The investigation conducted by the Louisiana Office of
the Attorney General, High Technology Crime Unit, revealed that Smith’s email account had been
accessed by an unauthorized user.40 Based upon these facts, Defendants claim “it cannot be disputed
that the causes of action asserted by Plaintiffs for the second time in the instant suit existed at the
time the final judgment in the bankruptcy proceeding was rendered in June 2010.”41
Finally, Defendants claim that the fifth criterion is met because this lawsuit “arose out of the
transaction or occurrence that was the subject matter of the proceedings before Judge Magner.”42
In the case proceeding before the bankruptcy court, Thundervision brought suit against DROR,
claiming that it violated the Computer Fraud and Abuse Act, the Wire Tap Act, and Louisiana Civil
Code Article 2315, for DROR’s alleged unauthorized access “to the computer system, records and
emails of Thundervision.”43 The final judgment included an award to Thundervision pursuant to the
Computer Fraud and Abuse Act and Louisiana Civil Code Article 2315, but according to Defendants
“Thundervision’s remaining claims against DROR were denied for want of proof.”44 Therefore,
Defendants maintain that the “claims asserted by Plaintiffs against DROR have already been
adjudicated in the United States Bankruptcy Court for the Eastern District of Louisiana” and that
therefore, Plaintiffs’ claims should be dismissed with prejudice under the doctrine of res judicata.45
40
Id.
41
Id.
42
Id. at p. 9.
43
Id. at p. 10.
44
Id. at p. 11.
45
Id.
8
In the alternative, Defendants assert that collateral estoppel bars Plaintiffs’ claims if the
claims are not barred under “true” res judicata.46 In support of this contention, Defendants cite Allen
v. McCurry,47 where the United States Supreme Court stated that collateral estoppel does not require
mutuality between the parties in the subsequent action. Collateral estoppel requires instead that (1)
the prior federal decision resulted in a judgment on the merits; (2) the same fact issue must have
been actually litigated in the federal court; and (3) the disposition of that issue must have been
necessary to the outcome of the prior litigation.48 Defendants quote the Fifth Circuit in Wehling v.
CBS49: “[the] parties need not be completely identical, so long as the party against whom estoppel
applies had a full and fair opportunity to litigate the issue in the previous lawsuit.”50 Further,
Defendants refer to Supreme Court precedent that extends collateral estoppel not only to a party, but
also to its privies.51 According to Defendants, Mendelbaum, as president of DROR, is in privity with
DROR, defendant in the previous bankruptcy case. Defendants contend that even if the parties
dispute Mendelbaum’s status as a privy of DROR, the issue is “ultimately irrelevant” because as
long as the party against whom estoppel applies had a full and fair opportunity to litigate the issue,
46
Id. at p. 12.
47
449 U.S. 90 (1980).
48
Am. Home Assurance Co. v. Chevron, U.S.A., Inc., 400 F.3d 265 (5th Cir. 2005).
49
721 F.2d 506 (5th Cir. 1983).
50
Id. at 508.
51
Rec. Doc. 43-1 at p. 13 (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326-27 (1979)).
9
it is barred from relitigation.52 It is Defendants’ contention that the bankruptcy court proceedings
provided such a “fair and full” opportunity for Plaintiffs.53
Lastly, Defendants address the final element to satisfy collateral estoppel, “whether the
determination of the issues were necessary to the judgment in the Bankruptcy Proceeding.”54
Defendants contend that the determinations of whether the email accounts of Thundervision and/or
Smith were improperly accessed were necessary to the judgment in the prior bankruptcy judgment
because those issues were critical to address the allegations against Defendants for violations of the
Computer Fraud and Abuse Act, the Wire Tape Act, and Louisiana Civil Code Article 2315.55
Defendants argue that “Plaintiffs should not be permitted to re-litigate the same issues just because
they are now bringing the same actions personally as opposed [to] through their respective business
entities,”56 as corporate entities can only act through actual persons.
In opposition to the pending motion, Plaintiffs first assert that Defendants’ “exceptions” for
res judicata and collateral estoppel should be denied on procedural grounds.57 Plaintiffs argue that
“although the peremptory exception of Res Judicata is recognized as a means of dismissing a matter
in Louisiana State courts under Code of Civil Procedure Article 927, the Federal Rules of Civil
Procedure do not recognize such exceptions.”58 Furthermore, Plaintiffs claim that “while Rule 8 of
52
Id.
53
Id. at pp. 13-14.
54
Id. at p. 14.
55
Id.
56
Id. at p. 15.
57
Rec. Doc. 46 at p. 7.
58
Id.
10
the Federal Rules of Civil Procedure allows Res Judicata and Estoppel to be plead as affirmative
defenses, the Federal Rules of Civil procedure do not allow the pleading of Res Judicata and
Estoppel in a motion as a lone means of dismissing a claim.”59 In this regard, Plaintiffs assert that
this motion should have been brought before Defendant answered the complaint.60
Plaintiffs also allege that Defendants’ “exceptions” should be dismissed on substantive
grounds. Concerning res judicata, although conceding that some elements of res judicata have been
met here, Plaintiffs contend that not all the elements necessary to invoke the doctrine res judicata
have been met and, therefore, the doctrine is inapplicable. Regarding the first element, “Plaintiffs
will concede that the Judgment in the Bankruptcy proceeding is valid and was not appealed by any
of the parties.”61 In response to the second factor, the finality of the judgment, Plaintiffs also concede
that “the Bankruptcy judgment is final.”62 However, Plaintiffs focus on the differences between the
state court suit and the present matter, arguing that, “it is DROR and NMI that filed suit against
Thundervision, (not a party to this suit), Smith, Higgins, and Wright Avenue on [the unpaid
invoices]. Here, Higgins, Smith, Wallace, and Wright Avenue have filed suit against nine (9)
defendants.”63 Plaintiff continues by arguing that “as some of the Plaintiffs in the 24th [Judicial
District Court] action are Defendants in this matter, any final judgment which may be rendered by
the State court will not provide a remedy to the Plaintiffs in this action. Accordingly, any final
Judgment of the 24th [Judicial District Court] will not have any effect on the causes of action and
59
Id.
60
Id.
61
Id. at p. 10.
62
Id. at p. 11.
63
Id.
11
remedies sought by the Plaintiffs in this action.”64
Concerning the third element, Plaintiffs maintain that “this matter involves several other
parties that were not a part of the previous suits.”65 Plaintiffs emphasize that Thundervision is not
a party in this matter and that Wallace, not a party to the previous state or bankruptcy proceedings,
is now a plaintiff in this matter.66 Further, Plaintiffs argue that defendants, “Mendelbaum, Felton,
Reutlinger, Beeson, Harrison, Today’s House, and Bergnaud - have never been parties to any of the
other suits previously mentioned.”67 Plaintiffs further contend that “considering none of the
individual Plaintiffs have previously sought relief concerning (5) causes of action against these nine
(9) Defendants, the DROR Defendants’ res judicata challenge fails.”68
In addressing the fourth prerequisite to trigger the application of res judicata and bar a
second suit, whether the causes of action asserted in the second suit existed at the time of final
judgment in the first litigation, Plaintiffs argue that “none of the individual Plaintiffs in this suit
made any claims in either the Bankruptcy proceeding or the 24th [Judicial District Court] action. As
such, since they have not previously asserted any causes of action, they should not be barred from
filing their first suit.”69
Finally, in discussing the fifth requirement for the application of res judicata, whether the
causes asserted in the second action arose out of the transaction and occurrence that was subject
64
Id. at p. 12.
65
Id.
66
Id.
67
Id.
68
Id. at p. 14 (emphasis in original).
69
Id. at pp. 14-15.
12
matter of the first litigation, Plaintiffs echo their previous argument that “individual plaintiffs in this
suit have not made claims in any of the other lawsuits.”70 For these reasons, Plaintiffs assert that res
judicata does not bar the present action.
Similarly, Plaintiffs argue that collateral estoppel is not triggered in this action.71 First among
Plaintiffs’ arguments is that according to the Louisiana law of collateral estoppel, “the doctrine of
collateral estoppel [only applies] to issues actually litigated in the prior proceeding.”72 To this point,
Plaintiffs maintain that “the plaintiffs in this matter have never brought five causes of action against
any of the Defendants in any court.”73 Furthermore, they claim that the plaintiffs in this action,
Higgins, Smith, Wallace, and Wright Avenue, “[h]ave never asserted any causes of action in any
courts until they filed this action.”74
Plaintiffs also address federal collateral estoppel.75 Regarding the first element, that a final
decision on the merits was rendered, Plaintiffs argue that “the Bankruptcy trial only involved
recouping Thundervision’s losses from hacking. The individual Plaintiffs here did not assert any of
their personal losses in the Bankruptcy proceedings.”76 Concerning the second element, whether this
same fact issue was actually litigated in the prior action, Plaintiffs make a similar argument: “none
70
Id. at p. 15.
71
Id. at p. 16.
72
Id. (emphasis in original) (citing Copeland v. Merrill Lynch & Co., Inc., 47 F.3d 1415 (5th Cir. 1995)).
73
Id.
74
Id. at p. 17 (emphasis in original).
75
Federal collateral estoppel requires that (1) the prior federal decision resulted in a judgment on the merits;
(2) the same fact issue must have been actually litigated in the federal court; and (3) the disposition of that issue must
have been necessary to the outcome of the prior litigation. Am. Home, 400 F.3d at 265.
76
Rec. Doc. 46 at p. 17.
13
of the Plaintiffs have asserted any causes of action or have sought any remedies until they filed suit
with this Honorable Court.”77 Again, much the same argument is made in relation to the third
element, that the decision was necessary to the outcome of the prior litigation: “since this litigation
involves different parties, different causes of action, and different remedies, the awards in the
previous actions cannot provide these Plaintiffs with relief in this action.”78
In reply, Defendants first address Plaintiffs’ challenge that Defendants’ affirmative defenses
of res judicata and collateral estoppel fail on procedural grounds.79 Defendants note that the defense
of res judicata was “specifically asserted in DROR and Mendelbaum’s Answer and Defenses, and
[res judicata] is not one of the seven [defenses] that must be brought prior to filing responsive
pleadings.”80 Next, Defendants address Plaintiffs’ claims that collateral estoppel was not properly
pled and was therefore waived. Defendants quote Federal Rule of Civil Procedure 12(b): “no defense
or objection is waived by joining it with one or more defenses or objections in a responsive pleading
or in a motion.”81 Defendants contend that, “[a]s the defenses of res judicata and collateral estoppel
are often interrelated, DROR avers that said latter defense is joined with DROR’s pleaded defense
of res judicata and has not been waived.”82 Defendants cite no authority to support this proposition.
77
Id. at p. 18.
78
Id. at pp. 18-19.
79
Rec. Doc. 50 at p. 1.
80
Id. at p. 2; see also Defendants’ Exceptions, Defenses, and Answer, Rec. Doc. 33.
81
Rec. Doc. 50 at p. 2.
82
Id.
14
Defendants reiterate their assertion that the substantive elements to trigger res judicata are
satisfied.83 Defendants also contend that the state court case on appeal is of no moment and that
Plaintiffs should not “be allowed to pursue the instant action against DROR and Mr. Mendelbaum
on the basis of a [s]tate [c]ourt [j]udgment on appeal and concerning only the personal guaranties
issued by Mr. Smith, Mr. Higgins and/or Wright Avenue Associates on accounts due and payable
to DROR, which have nothing to do with the five causes of action asserted against DROR and Mr.
Mendlbaum in the instant case.”84 Defendants’ invocation of res judicata here is based on the
bankrutpcy court proceeding. Defendants distinguish the state court’s denial of their exception for
res judicata on the basis that:
[T]he claims asserted against Mr. Smith, Mr. Higgins and Wright Avenue Associates
by DROR were claims based on guarantees issued by said parties on the accounts of
Thundervision as claimed in the Bankruptcy Proceeding. A denial of res judicata in
the state action is distinguished from the instant action in which DROR and Mr.
Mendelbaum seek claim preclusion for the claims of Thundervision asserted and
adjudicated in the Bankruptcy Proceeding, but which exact claims are now asserting
individually based on the exact same facts and evidence presented in the [prior]
Bankruptcy Court.85
Defendants emphasize that the only difference “is that while the previous claims [were] brought
on behalf of Thundervision as against DROR, the instant claims are being brought by the owners
of Thundervision as against DROR and its sole owner.”86
Next, Defendants address Plaintiffs’ argument that the present case includes five new causes
of action: (1) damages for unauthorized access to Thundervision’s computer system and business
83
Id. at pp. 3-4.
84
Id. at p. 4.
85
Id.
86
Id.
15
email; (2) damages for a violation of the Computer Fraud and Abuse Act; (3) damages arising from
the Wire Tap Act; (4) damages for invasion of privacy; and (5) damages under Louisiana Civil
Code Article 2315.87 Defendants claim that after Thundervision declared bankruptcy during the
state court proceeding, “in adversary proceedings before [the bankruptcy] court, Thundervision
claimed an offset alleging damages resulting from unauthorized access to Thundervision’s
computer system and business e-mail(s), damages for negligence, breach of contract, breach of
express and implied warranties, conspiracy, violation of the Computer Fraud and Abuse Act, the
Wire Tap Act, and for damages under Louisiana Civil Code art. 2315.”88 In Defendants’ words,
“unquestionably, these are the exact same claims Plaintiffs now assert against DROR and Mr.
Mendelbaum, whereby the doctrine of res judicata must be applied.”89
III. Law and Analysis
A. Waiver of Res Judicata and Collateral Estoppel on Procedural Grounds
Federal Rule of Civil Procedure 8 classifies res judicata and collateral estoppel as two
distinct affirmative defenses,90 and “all affirmative defenses must be specifically pleaded in the
answer or in an amended answer permitted under Fed. R. Civ. P. 15(a), or be deemed waived.”91
In Defendants’ answer, it specifically pleads the “Exception of Res Judicata.”92 Regardless, the
87
Id. (citing Rec. Doc. 46 at pp. 3-4).
88
Id. at p. 6. (internal citations omitted).
89
Id.
90
Fed. R. Civ. P. 8(c)(1).
91
Morgan Guaranty Trust Co. of New York v. Blum, 649 F.2d 342, 345 (5th Cir. Unit B July, 1981).
92
Rec. Doc. 33 at p. 8, ¶ 16.
16
Fifth Circuit has stated that it will consider res judicata, even if never pled: “‘[W]here all of the
relevant facts are contained in the record before us and all are uncontroverted, we may not ignore
their legal effect, nor may we decline to consider the application of controlling rules of law to the
dispositive facts, simply because neither party has seen fit to invite our attention to the issue by
technically correct and exact pleadings.’”93 Here, not only was res judicata specifically pled in the
answer, but all the facts concerning the prior proceeding are before the Court and uncontroverted,
which would allow for the consideration of the applicability of res judicata even if the doctrine had
never been pled. Therefore, the doctrine of res judicata is not barred on procedural grounds.
Plaintiffs have also argued that the affirmative defense of collateral estoppel was not
specifically pled in the answer and, thus, is waived. “Collateral estoppel is an affirmative defense
under FED. R. CIV. P. 8(c) which if not pleaded is considered waived.”94 In Defendants’ answer
to the complaint and answer to the amended complaint, “collateral estoppel” is not specifically
raised.95As mentioned above, Rule 8 explicitly lists res judicata and collateral estoppel as two
independent affirmative defenses, undercutting Defendants’ argument that pleading res judicata
impliedly implicates collateral estoppel as well. However, when collateral estoppel is “raised in the
trial court in a manner that does not result in unfair surprise, [] technical failure to comply precisely
with Rule 8(c) is not fatal.”96 In American Casualty Co. v. United Southern Bank,97 the Fifth Circuit
93
Russel v. SunAmerica Sec., Inc., 962 F.2d 1169, 1172 (5th Cir. 1992) (quoting Am. Furniture Co. v. Int’l
Accommodations Supply, 721 F.2d 478, 482 (5th Cir. Unit A Mar., 1981)).
94
Am. Casualty Co. v. United S. Bank, 950 F.2d 250, 253 (5th Cir. 1992).
95
See Rec. Doc. 33 (answer to complaint); see also Rec. Doc. 34 (answer to amended complaint).
96
Allied Chem. Corp. v. Mackay, 695 F.2d 854, 855-56 (5th Cir. 1983).
97
950 F.2d 250 (5th Cir. 1992).
17
held that a defense of collateral estoppel was properly before the court even though it had not been
affirmatively pled.98 In that case, the Fifth Circuit reasoned that because the previous state court
judgment, which created the collateral estoppel issue, had been “sufficiently raised in the trial
court,” that the plaintiff “was not prejudiced in its ability to respond.”99 Here, although collateral
estoppel was not specifically pled by Defendants in accordance with Rule 8, the prior bankruptcy
and state court proceedings were initially raised by Plaintiffs in the complaint,100 and therefore,
Plaintiffs cannot claim that they have been “prejudiced in their ability to respond.” For these
reasons, the issue of collateral estoppel is also properly before this Court.
B. Applicability of Res Judicata
As a preliminary matter, this Court must determine the preclusive effect that applies to the
bankruptcy proceeding upon this matter. Both parties analyze the issue of res judicata and
collateral estoppel under Louisiana law. For support, Defendants cite Semtek International Inc. v.
Lockheed Martin Corp.,101where the Supreme Court stated that “the preclusive effect of a judgment
entered by a federal court exercising diversity jurisdiction is a question of federal common law, but
that in general, is to be determined by reference to the law of the state whose substantive law
applied in that diversity action.”102 Under this logic, Defendants argue that the preclusive effect of
Judge Magner’s opinion in the bankruptcy proceeding is controlled by Louisiana res judicata law.
98
Id. at 253.
99
Id.
100
Rec. Doc. 1 at p. 3, ¶ 5.
101
531 U.S. 497 (2001).
102
Id.
18
However, this argument overlooks the fact that neither of the adversary proceedings consolidated
before Judge Magner were based in diversity. Rather, Thundervision removed the state court
proceeding concerning “open accounts” pursuant to bankruptcy jurisdiction under 28 U.S.C. §
1334, not under 28 U.S.C. § 1332 diversity jurisdiction. More importantly, the jurisdictional basis
for Thundervision’s claims against DROR – which DROR and Mendelbaum now seek to prevent
Plaintiffs from raising here– were based on Section 1334(b) as well. Further, many of the claims
brought by Thundervision against DROR specifically alleged violations of federal law, and as such,
would have supported federal question jurisdiction.103
Thus, because the prior proceeding that Defendants argue bars the claims against them in
this case on the basis of res judicata and/or collateral estoppel was a federal proceeding not based
in diversity, Semtek is inapplicable. Rather, the Court will apply the general rule that “the
preclusive effect of a federal-court judgment is determined by federal common law.”104
In Vines v. University of Louisiana at Monroe,105 the Fifth Circuit outlined the four
requirements necessary to trigger res judicata under federal law and bar a subsequent suit:
First, the parties in the later action must be identical to (or at least in
privity with) the parties in the prior action. Second, the judgment in
the prior action must have been rendered by a court of competent
jurisdiction. Third, the prior action must have concluded with a final
judgment on the merits. Fourth, the same claim or cause of action
must be involved in both suits.106
103
DROR and Mendelbaum do not appear to rely on the state court judgment to support their claim of res
judicata, nor should they. The state court judgment only addressed the issue of whether Smith, Higgins, and Wright
Avenue were guarantors of the contracts entered into between DROR and Thundervision. The state court proceedings
did not concern whether anyone’s rights were violated by any unlawful access to email.
104
Taylor v. Sturgell, 553 U.S. 880, 892 (2008).
105
398 F.3d 700 (5th Cir. 2005).
106
Id. at 704-05.
19
The parties dispute whether the first element, identity of the parties, is satisfied. Defendants argue
that the only difference is that although Thundervision sued DROR in the first suit, now the
principals of Thundervision bring suit against DROR and Mendelbaum, DROR’s president.
However, as expressed in Vines, parties that are privies of one another will also satisfy this factor.107
With regard to res judicata, the Fifth Circuit recognizes three general instances in which privity
will be found: “(1) where the non-party is the successor in interest to a party’s interest in property;
(2) where the non-party controlled the prior litigation; and (3) where the non-party’s interests were
adequately represented by a party to the original suit.”108 In Drier v. Tarpon Oil Company,109 the
Fifth Circuit found privity where the party in the second suit was “president and major stockholder
of the corporation [that was a party in the previous suit] and he admitted in deposition that he made
the ‘ultimate decisions.’”110
Here, Plaintiffs Higgins and Smith are the sole members of Thundervision, LLC,111 and are
therefore clearly privies of that entity. Plaintiff Wright Avenue was an original owner of
Thundervision, and Higgins is a managing partner of Wright Avenue.112 Higgins, a member of
Thundervision and a managing partner of Wright Avenue, was in a position to advance Wright
107
Id.
108
Meza v. Gen. Battery Corp., 908 F.2d 1262, 1267 (5th Cir. 1990).
109
522 F.2d 199 (5th Cir. 1975).
110
Id. at 200.
111
Rec. Doc. 43-1 at p. 3.
112
Rec. Doc. 1 at pp. 1-2.
20
Avenue’s interest in the first suit as well as his own, and therefore both are in privity with
Thundervision, a party in the previous action.
DROR was a named party in both the bankruptcy and state court proceedings, and therefore
DROR clearly meets the first requirement to trigger res judicata. Mendelbaum was never a named
party in the prior suits but is president and sole member of DROR. A defendant who was not a party
in the prior litigation may also assert res judicata if he is in privity with the previously named
defendant.113 Privity “requires us to look at the surrounding circumstances to determine whether
claim preclusion is justified.”114 The Fifth Circuit has recognized that there is no definitive criteria
by which to establish if privity exists:
Privity is not a requirement that we can satisfy through inquiry; rather the existence
of ‘privity’ is the inquiry satisfied. In short, parties which are sufficiently related to
merit the application of claim preclusion are in privity... Our analysis is particularly
fact-based.115
However, the Fifth Circuit has stated that privity “represents a legal conclusion that the relationship
between the one who is a party on the record and the non-party is sufficiently close to afford
application of the principle of preclusion.”116
In Lubrizol Corp. v. Exxon Corp.,117 the Fifth Circuit declined to make any “broad
pronouncements about the doctrines of mutuality and privity” but recognized that privity for a
defendant is often found and a “second bite at the apple” is denied where:
113
Russell, 962 F.2d at 1173 (citing Nevada v. United States, 463 U.S. 110, 129 (1983)).
114
Id.
115
Id. at 1174.
116
Sw. Airlines Co. v. Tx. Int’l Airlines, Inc., 546 F.2d 84, 95 (5th Cir. 1977).
117
571 F.2d 1279 (5th Cir. 1989).
21
a plaintiff has sued parties in serial litigation over the same transaction; where
plaintiff chose the original forum and had the opportunity to raise all its claims
relating to the disputed transaction in the first transaction; where there was a “special
relationship” between the defendants in each action, if not complete identity of
parties; and where although the prior action was concluded, the plaintiffs altered suit
continued to seek essentially similar relief.118
Considering these principles articulated by the Fifth Circuit, this Court finds that Mendelbaum is
a privy of DROR under these circumstances. Smith, Higgins, and Wright Avenue seek “essentially
the same relief” in this action as in the prior actions arising from the same occurrence, the alleged
hacking of Thundervision’s business email. Smith, Higgins, and Wright Avenue have already had
an opportunity to raise all of the claims asserted here. Moreover, Mendelbaum, as sole member and
president of DROR, has a sufficiently “special relationship” to establish privity and satisfy this
element of res judicata.
However, Plaintiff Melanie Wallace, who has only been identified as an employee of
Thundervision and whose interest in this suit is unclear, was not a party to the bankruptcy
proceeding. Based upon the lack of information about her, here, the Court has insufficient
information to determine whether she is in privity with Thundervision. Therefore, because the Court
cannot analyze this factor in regard to Wallace, it is reluctant to preclude Wallace’s cause of action
or bar a suit against DROR and Mendelbaum pursuant to the principles of res judicata, if such
claims actually exist.119 The Court’s analysis will only consider the existence of the remaining
elements of res judicata as to the claims of plaintiffs Higgins, Smith, and Wright Avenue.
118
Id. at 1288. While Plaintiffs in this action did not initiate the prior state court action, they later declared
bankruptcy in the Eastern District of Louisiana and removed the pending state court suit to the federal bankruptcy court.
In this sense, considering the issues decided in the bankruptcy court, Plaintiffs chose the original forum.
119
Whether Wallace has a right of action will be discussed later. See infra Part III.D.
22
As previously noted, Plaintiffs have conceded the second and third elements of res judicata
-- that the prior decision was rendered by a court of competent jurisdiction and that it was a final
judgment on the merits120 – and therefore, these elements do not warrant further discussion.
However, Plaintiffs dispute the fourth factor – whether the same claim or cause of action is
implicated in the prior and present suit. Plaintiffs do not address this element directly but rather
repeat that “individual plaintiffs in this suit have not made claims in any other lawsuits.”121
However, as was established above, Higgins, Smith, and Wright Avenue are privies of
Thundervision, who brought a cause of action in the bankruptcy proceeding. The Fifth Circuit
follows the transactional test to determine if two suits involve the same claim for res judicata
purposes.122 “The critical issue is not the relief requested or the theory asserted but whether plaintiff
bases the two actions on the same nucleus of operative facts.”123 Res judicata will bar actions that
were previously brought or could have been brought in the first suit.124 Therefore, even if Plaintiffs’
complaint in this case alleges a different theory for relief than Thundervision did in the first suit, if
the complaint implicates the same common nucleus of operative facts, the fourth element of res
judicata will nonetheless be satisfied.
In Plaintiffs’ complaint in this matter, they allege that Felton gave Smith’s password to
several of the other defendants, in violation of he Computer Fraud and Abuse Act and the Wire Tap
120
Rec. Doc. 46 at pp. 10-11.
121
Id. at p. 15.
122
In re Matter of Howe, 913 F.2d 1138, 1114 (5th Cir. 1990).
123
Id.
124
Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981).
23
Act.125 In this same complaint, Plaintiffs admit that this alleged activity was the basis of the state
court action that was later consolidated into the bankruptcy proceeding in the Eastern District of
Louisiana.126 This is further confirmed by the opinion of the bankruptcy court itself, which clearly
establishes that the claims and underlying factual allegations arise from the same common nucleus
of operative facts at issue here.127 Therefore, the present case is sufficiently related to the prior action
and satisfies the final factor to trigger res judicata. As all four factors to trigger res judicata are
satisfied between these defendants, DROR and Mendelbaum, and plaintiffs Smith, Higgins, and
Wright Avenue, res judicata bars all actions asserted here against DROR and Mendelbaum by the
aforementioned plaintiffs.
C. Applicability of Collateral Estoppel
As all claims asserted against DROR and Mendelbaum are barred under the doctrine of res
judicata, except, perhaps, those brought by Wallace, the Court need only consider the applicability
of collateral estoppel to Wallace’s claims. As stated above, collateral estoppel, or issue preclusion,
will apply when “(1) the prior federal decision resulted in a judgment on the merits; (2) the same fact
issue must have been actually litigated in the federal court; and (3) the disposition of that issue must
have been necessary to the outcome of the prior litigation.”128 However, this Court need not analyze
these factors here, noting that “while complete identity of all parties is not required, the party against
whom collateral estoppel would be applied generally must either have been a party, or a privy to the
125
Rec. Doc. 1 at pp. 3-4.
126
Id. at p. 3, ¶ 5.
127
Rec. Doc. 43, Ex. D.
128
Am. Home, 400 F.3d at 265.
24
party, in the prior litigation.”129 Wallace was not a party, and the Court has insufficient facts to
determine whether she is a privy to a party who participated in the prior litigation. Therefore the
Court cannot determine whether her claims are subject to collateral estoppel.
D. Wallace’s Entitlement to Relief
In this matter, it is unclear the exact nature of Wallace’s right to relief or reason for inclusion
in this lawsuit. In the initial complaint, Plaintiffs’ allegations only reveal that Wallace “was a
resident of Ascension Parish, Louisiana,” and “is an employee of the [Louisiana Homes & Garden
Magazine].130 Plaintiffs complaint arises from the allegation that “Felton gave Mendelbaum, acting
as a limited partner of DROR and president of general partner, NMI, Smith’s e-mail password and
thereafter all defendants used that password to read Smith’s e-mails to and from the other plaintiffs
about their business and legal matters as well as those to and from his (Smith’s) attorneys in the
petition for Thundervision’s alleged breach of contract by DROR and NMI .... The purpose of
Felton’s [sic] giving Smith’s password to defendants was to facilitate defendants’ takeover of
‘Louisiana Homes & Garden Magazine.”131 The amended complaint, which realleges the allegations
in the initial complaint, provides no further information on why Wallace may have a claim, except
for the vague and conclusory statement that “[t]he plaintiffs have suffered damages as a direct result
of all the defendants’ invasion of the plaintiffs’ privacy as the result of the defendants’ unauthorized
access to their computer system, records and emails, including private business matters and
129
Vines, 398 F.3d at 705.
130
Rec. Doc. 1 at ¶¶ 2, 4.
131
Id. at ¶¶ 5-6 (emphasis added).
25
strategies and privileged communications between plaintiffs and their attorneys.”132 Nowhere is it
explained how Wallace’s privacy may have been invaded, because Plaintiffs only allege that Smith’s
email account was accessed without authorization.
Defendants have directly challenged Wallace’s right of action in this matter,133 and Plaintiffs
fail to sufficiently address this argument in opposition to the pending motion. Plaintiffs only
response is the broad statement that “Many relevant facts have been discovered by the filing of the
two other suits. Factual information learned from the other suits made it necessary to include
Wallace in this suit.”134 Wallace by her own words is only an “office clerk” for Louisiana Homes
& Garden, a magazine operated by Thundervision.135 A plaintiff’s obligation to provide the grounds
for his “entitlement to relief” requires more than “labels and conclusions.” “Factual allegations must
be enough to raise a right to relief above the speculative level.”136 “‘[T]he pleading must contain
something more ... than ... a statement of facts that merely creates a suspicion [of] a legally
cognizable right of action.’”137 Federal Rule of Civil Procedure 8(a)(2) requires a pleader to provide
a “plain statement” showing that the “pleader is entitled to relief.” Failure to do so will result in a
Court dismissing the pleader’s claims for failure to state a claim upon which relief may be granted.138
The allegations in the original and amended complaint rely solely on conclusions and fail to provide
132
Rec. Doc. 9 at ¶ 7.
133
See Rec. Doc. 43-1 at p. 7 (“Melanie Wallace, who, by her own testimony is merely an ‘administrative
assistant’ of Thundervision, has no right of action whatsoever.”).
134
Rec. Doc. 46 at p. 15.
135
Rec Doc. 43, Ex. J. at p. 2.
136
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
137
Id. (quoting 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235–36 (3d ed. 2004)).
138
Id.
26
adequate factual allegations to make Wallace’s right to relief apparent. Moreover, in opposition to
the pending motion Plaintiffs provide no further explanation of why Wallace is entitled to relief.
Therefore, this Court agrees with Defendants and finds that Wallace has not stated facts sufficient
to support a finding that she has a right of action or entitlement to relief here.
IV. Conclusion
Considering that the claims against Defendants DROR and Mendelbaum by Plaintiffs Smith,
Higgins, and Wright Avenue satisfy the elements of res judicata, the current claims against
Defendants by Higgins, Smith, and Wright Avenue are barred. Therefore, the pending motion is
granted in this regard and all claims by Smith, Higgins, and Wright Avenue against DROR and
Mendelbaum are dismissed with prejudice. However, because Wallace did not participate in the
prior action, nor has sufficient information been provided to the Court to determine whether she is
in privity with a party who did, with regard to her, the pending motion is denied on that ground.
However, the record currently is inadequate to establish that Wallace has a right of action or has
stated a claim upon which relief may be granted. Plaintiffs, in responding to the motion, had a full
opportunity to address this issue and failed to provide additional facts or information, and so, the
claims filed by Wallace are dismissed for failure to state a claim upon which relief may be granted.
Accordingly,
IT IS HEREBY ORDERED that Defendants DROR and Mendelbaum’s Motion to Dismiss
on the Basis of Res Judicata and Collateral Estoppel139 is GRANTED and such claims are
DISMISSED WITH PREJUDICE.
139
Rec. Doc. 43.
27
IT IS FURTHER ORDERED that Plaintiff Wallace’s claims are DISMISSED WITH
PREJUDICE for failure to state a claim upon which relief may be granted.
30th
NEW ORLEANS, LOUISIANA, this ____ day of November, 2012.
_________________________________
NANNETTE JOLIVETTE BROWN
UNITED STATES DISTRICT JUDGE
28
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