United States Court of Appeals,

Fifth Circuit.

No. 91–1371.

Othar RUSSELL, et al., Plaintiffs–Appellants,

v.

SUNAMERICA SECURITIES, INC., Defendant–Appellee.

June 15, 1992.

Appeal from the United States District Court for the Southern District of Mississippi.

Before KING, JOHNSON, and DAVIS, Circuit Judges.

KING, Circuit Judge:

Plaint iffs Othar Russell, Donna Russell, Bobby Joe Russell, Carolyn Russell, Charles H.

Sheffield, Margaret Sheffield, and Bonnie S. Brooks appeal from the district court's grant of summary

judgment against them in favor of SunAmerica Securities, Inc. The district court found that a release

signed by Pl aint iffs and Southmark Financial Services, Inc., a corporation whose assets were

purchased by SunAmerica, also released SunAmerica. We find that Plaintiffs' action is foreclosed by

the doctrine of res judicata, and affirm the judgment of the district court on this ground.

I. FACTS AND PROCEDURAL HISTORY

In 1988, Plaint iffs brought an action against Southmark Financial Services, Inc.

("Southmark"), Equivest, Inc., and D. Andrew Pickens in the Southern District of Mississippi,

Jackson Division ("1988 action"), alleging causes of action for violation of state and federal securities

laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1964, and for

common law fraud, breach of contract, and gross negligen ce. Southm ark was a broker-deal er

registered under the Securities Exchange Act of 1934 and lic ensed by the National Association of

Securities Dealers, Inc. Plaintiffs alleged t hat Pickens, in his capacity as branch manager for and

agent o f Southmark, induced Plaintiffs to transfer money to him based upon fraudulentrepresentations that the money would be used to purchase securities which he recommended to them

for investment purposes. Plaintiffs averred that Pickens failed to invest any o f t he mo ney as

promised, and instead wrongfully converted and embezzled the money for his own and Southmark's

benefit. Southmark, argued Plaintiffs, was vicariously liable for Pickens' wrongdoing and was liable

for its own gross negligen ce in failing to supervise and investigate its operations so as to discover

Pickens' activities.

On March

24, 1989, SunAmerica Securities, Inc. ("SunAmerica") entered into an asset

purchase agr eement with Southmark. Under this agreement, SunAmerica acquired Southmark's

co nt ract rights with registered sales representatives, various books and records, furniture, and

fixtures, in return for which SunAmerica paid a sum of cash and a porti on of its income derived from

activities of the registered representatives over a two-year period. According to the agreement,

SunAmerica did not assume any of Southmark's liabilities.

Ultimately, Plaint iffs entered into a settlement agreement with Southmark. The parties

executed a release, which provided that for $105,000, Plaint iffs released Southmark from "any and

all past, present, or future claims." The Plaintiffs expressly did not release Pickens or Equivest, Inc.

On the basis of this release, Southmark was dismissed as a defendant by an agreed order of dismissal

with prejudice and consent judgment entered by the district court on April 30, 1990.

Shortly thereafter, on July 10, 1990, Plaintiffs brought the present action in the Southern

District of Mississippi, Eastern Division, against SunAmerica and Pickens. Plaintiffs' complaint in the

instant action contained allegations essentially identical to those in the 1988 action, together with

allegations that SunAmerica, by virtue of its having acquired the assets of and continued operation

of Southmark, is liable as a successor corporati on to Southmark for the torts and debts of Southmark.

The release of Southmark did not release SunAmerica, Plaint iffs argued, because it did not specifically

provid e fo r the release of SunAmerica, and the parties did not intend for the release to affectSunAmerica. They also alleged that SunAmerica's purchase of Southmark's assets was fraudulent,

and designed to remove funds that might have been available to pay Plaint iffs' claims. Alternatively,

Plaintiffs contended that the release was only partial and did not preclude further litigation.

On October 19, 1990, SunAmerica moved in the Eastern Division to transfer the case to the

Jackso n Division (where the 1988 action against Pickens was still pending), consolidate the t wo

cases, or dismiss the instant action for failure to state a claim. Alternatively, SunAmerica moved for

summar y judgment , arguing that it could not be liable as the successor to Southmark because its

purchase of Southmark's assets left Southmark with sufficient assets to pay Plaint iffs' claims. Next,

it argued that its purchase of assets was in no way fraudulent. Finally, SunAmerica argued that the

release signed in April 1990 precluded relitigation of Plaintiffs' claims.

On March 6, 1991, the district court granted SunAmerica's motion for summary judgment,

reasoning that where liabilit y is sought to be imposed against a successor corporati on for the torts

of its predecessor, the successor's liability, if any, derives exclusively from the liabilit y to which the

predecessor could have been subjected. Thus, continued the district court, SunAmerica could have

no greater liabilit

y to Plaint iffs than did Southmark. With regard to Plaintiffs' claim that the release

was only partial, the court disagreed. According to the court, "[g]iven the comprehensive nature of

the language of the release, it strains credibility for plaint iffs to now take the position that they never

intended to release all of their cla ims against Southmark relating to Pickens' activities." Because

Sout hmark was completely released from liability, reasoned the court, SunAmerica was similarly

released. A final order was entered in favor of SunAmerica on March 14, 1991. Plaintiffs timely filed

a notice of appeal.

II. DISCUSSION

On appeal, Plaint iffs argue that the district court erre d in holding that the release of

Southm ark necessarily released SunAmerica, inasmuch as the release did not specifically mentionSunAmerica or manifest an intention by the parties to release any corporate successor to Southmark.

Plaintiffs argue in the alternative that, even if the language of the release does include SunAmerica,

the release itself is invalid because it was procure d t hro ugh the fraudulent misrepresentations of

Southmark's attorney s that Southmark was insolvent and could not pay any more toward Plaintiffs'

claims.

We need not address Plaint iffs' primary contention because we find that their relitigation of

the claims against SunAmerica is barred by res judicata. We begin by noting that SunAmerica did not

plead the doctrine of res judicata as an affirmative defense. Under Federal Rule of Civil Procedure

8(c), the doctrine must be affirmat ively pled. Failure to so plead usually precludes the district court

and appellate courts from considering the doctrine. C a rbonell v. Louisiana Dep't of Health &

Human Servs., 772 F.2d 185, 189 (5th Cir.1985). We have held, ho wever, that we may raise the

issue of res judicata sua sponte "as a means to affirm the district court decision below." U nited Home

Rentals, Inc. v. Texas Real Estate Comm'n, 716 F.2d 324, 330 (5th Cir.1983), cert. denied, 466 U.S.

928, 104 S.Ct. 1712, 80 L.Ed.2d 185 (1984); see also Robertson v. Interstate Securities Co., 435

F.2d 784, 787 n. 4 (8th Ci r.1971). In A merican Furniture Co. v. International Accommodati ons

Supply, 721 F.2d 478, 482 (5th Cir.1981), we noted as follows:

We are cognizant that res judicata, as such, has not been specially pled. Fed.R.Civ.P. 8(c).

In the posture of this case, however, where 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 invit e our attention to the issue by technically correct and exact

pleadings. We do so sua sponte.

See also Nagle v. Lee, 807 F.2d 435, 438 n. 2 (5th Cir.1987); s ee generally Meza v. General Battery

Corp., 908 F.2d 1262, 1274 (5th Cir.1990) (appellate court may af firm a summary judgment on

grounds other than those relied upon by the district court when it finds in the record an adequate and

independent basis for that result); Brow n v. Southw estern Bell Tel. Co., 901 F.2d 1250, 1255 (5th

Cir.1990) (same). In the instant case, the relevant fact s are in the record before us and form an

adequate basis for our invocation of res judicata.1 Plaintiffs also argue that a settlement agreement resulting in a consent judgment may not be

invoked by a non-party to justify claim preclusion in favor of the non-party. To do so, argue

Plaintiffs, would extend the reach of the settlement agreement beyond the scope of the parties'

expected bargain. This argument is without merit. As we noted in Lubrizol Corp. v. Exxon

Corp., 871 F.2d 1279, 1288 (5th Cir.1989), "the existence of a settlement agreement is ...

irrelevant to the operation of claim preclusion." We note that had Plaintiffs obtained judgment

after trial against Southmark, and then filed the present action against SunAmerica, the principles

of claim preclusion would apply as they do now. See id.; see also Cahill v. Arthur Andersen &

Co., 659 F.Supp. 1115 (S.D.N.Y.1986) (holding that scope of release which formed basis of

consent judgment is irrelevant where defendant in second action was in privity with defendants in

earlier action), aff'd, 822 F.2d 14 (2d Cir.1987). In either case, the issue concerns the extent to Federal law determines the res judicata effect of a prior federal court judgment. M eza, 908

F.2d at 1265; I

n re Air Crash at Dallas/Ft. Worth Airport, 861 F.2d 814, 816 (5th Ci r.1988).

Application of res judicata is proper only if the following four requirements are met: (1) the parties

must be identical in the two suits; (2) the prior judgment must have been rendered by a court of

competent jurisdiction; (3) there must be a final judgment on the merits; and (4) the same cause of

action must be invol ved in both cases. M eza, 908 F.2d at 1265; H owell Hydrocarbons, Inc. v.

Adams, 897 F.2 d 183, 188 (5th Ci r.1990); N ilsen v. City of Moss Point, 701 F.2d 556, 559 (5th

Cir.1983) (en banc). As to the second element, the part ies do not question the jurisdiction of the

Southern District of Mississippi in the first acti o n. As to the third element, this court has long

recognized that a consent judgment is a judgment on the merits, and is normally "given the finality

accorded under the rules of claim prec lusion." K aspar Wire Works, Inc. v. Leco Eng'g & Mach.,

Inc., 5 75 F.2d 530, 538–39 (5th Cir.1978); s ee also Bradford v. Bronner, 665 F.2d 680 (5th

Cir.1982); Jarrard v. Southeastern Shipbuilding Corp., 163 F.2d 960 (5th Cir.1947). The fourth

element is satisfied because this action and the 1988 action involved essentially the same allegations

regarding the same underlying torti ous acts of Pickens. S ee Citibank, N.A. v. Data Lease Financial

Corp., 904 F.2d 1498, 1503 (11th Cir.1990) (" "if a case arises out of the same nucleus of operative

facts, or is based upon the same predicate, as a former action, ... the two cases are really the same

"claim" or "cause of action" for purposes of res judicata ' ") (citation omitted).

In response to our request for supplemental briefing on this issue, Plaint iffs contest only the

first element, identity of parties. 1 Plaintiffs contend, for purposes of this issue, that SunAmerica iswhich the non-party, here SunAmerica, may assert the benefit of a judgment against a prior

defendant. a different entity than Southmark, and that there is therefore no identity between the defendants in

this action and those in the 1988 action. SunAmerica responds that, insofar as the heart of Plaintiffs'

theory of recovery is that SunAmerica is a "mere continuation" of Southmark, the requirem ent of

identity of parties is necessarily satisfied.

To satisfy the identity element, strict ide nt it y o f parties is not necessary. A non-party

defendant can assert res judicata so long as it is in "privity" with the named defendant. S ee Nevada

v. United States, 463 U.S. 110, 129, 103 S.Ct. 2906, 2917, 77 L.Ed.2d 509 (1983); B aylor v. HUD,

913 F.2d 223, 225 (5th Cir.1990). "Privity" is recognized as a broad concept, which requires us to

look to the surrounding circumstances to determine whether claim preclusion is ju stified. As one

treatise has noted,

[e]xceptions to the rule that nonparties cannot be bound were traditionally expressed by

statements that a judgment is bind i ng on parties and persons in "privity" with them. Older

definitions of p rivity were very narrow. As the preclusive effects of judgments have been

expanded to include nonparties in more and more situations, however, it has come to be

recognized that the privit y label simply expresses a conclusion that preclusion is proper.

Modern decisions search directly for circumstances that justify preclusion.

18 C. Wright, A. Miller & E. Cooper, Federal Pr actice and Procedure: Jurisdiction § 4449, at

418–19 (1981); see also Southw est Airlines Co. v. Texas Int'l Airlines, Inc., 546 F.2d 84, 95 (5th

Cir.) (privity is nothing more than 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") (citation omitted), cert. denied, 434 U.S. 832, 98 S.Ct. 117, 54 L.Ed.2d 93 (1977);

Bruszewski v. United States, 181 F.2d 419, 423 (3rd Cir.) (Goodrich, J., concurring) ("Privity states

no reason for including or excluding one from the estoppel of a judgment. It is merely a word to say

that the relationship between the one who is a party on the record and an other is close enough to

include that other within the res judicata."), cert. denied, 340 U.S. 865, 71 s.Ct. 87, 95 L.Ed. 632

(1950). As case law and scholars recognize, "privity" is not a requirement we can satisfy throughinquiry; 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. With this in mind, our

analysis is particularly fact-based, and hinges upon SunAmerica's precise relationship to Southmark.

Unfortunately, we have little guidance as to whether a corporati on a nd its successor are

sufficiently related for preclusion purposes. Both parties recognize that SunAmerica's liability in the

instant case as a successor corporati on is, if a nyt hing, derivative; that is, SunAmerica's alleged

liabilit y for Pickens' conduct derives from that of Southmark, and if Southmark is not l i able to

Plaint iffs, then SunAmerica is likewise not liable. We do have some guidance from other circuits in

another field of derivative liability: vicarious liability in the employment context.

Several circuits have considered whether a vicarious liabilit y relationship constitutes sufficient

privity to merit the application of claim preclusion. In S pector v. El Ranco, Inc., 263 F.2d 143 (9th

Cir.1959), a hotel guest brought suit against a hotel e mplo yee for injuries sustained at the hotel.

There had been an earlier verdict and judgment on the same claim in favor of the hotel. The Ninth

Circuit held that the employee was entitled to raise the prior judgment as a bar to the plaint iff's action

against him:

Where, as here, the relations between two parties are analogous to that of principal and agent, the rule is that a judgment in favor of either, in an action brought by a third party, rendered

upon a ground equally applicable to both, is to be accepted as conclusive against the plaint iff's

right of action against the other.

Id. at 145; s ee also Pelletier v. Zw eifel, 921 F.2d 1465, 1502 (11th Cir.) (finding privity for purposes

of res judicata between principal and agent), cert. denied,

––– U.S.

––––, 112 S.Ct. 167, 116 L.Ed.2d

131 (1991); M

andarino v. Pollard, 718 F.2d 845, 850 (7th Cir.1983) (finding privity for res judicata

purposes between corporati on and its officers and directors); s ee also Cahill v. Arthur Andersen &

Co., 659 F.Supp. 1115, 1122 (S.D.N.Y.), aff'd, 822 F.2d 14 (1987).

The Seventh Circuit interpreted the Spector decision in Lambert v. Conrad, 536 F.2d 1183(7th Cir.1976). In Lambert, a discharged university employee brought a civil rights action against

employees of the board of regents fo llo wing dismissal of an earlier action against the board itself.

After noting that both suits pertained to the same operative facts, the Seventh Circuit stated:

The present defendants are employees of the Board which was the defendant in the prior

action. In S

pector v. El Ranco, Inc., 263 F.2d 143 (9th Cir.1959), the Ninth Circuit held that

a suit against an employee was barred by a judgment in favor of his employer.... Apparently

there was no question that the employee had been acting within the scope of his employment

at the time of his actions relating to the accident which occurred .... We hol d that the

difference in the identity of the defendants in the present action from those in the prior action

is insufficient reason to prevent plaintiff from being bound.

Id. at 1186; see also Lober v. Moore, 417 F.2d 714 (D.C.Cir.1969) (summary judgment sustained

on res judicata grounds in favor of a cab driver in a personal injury action brought by a passenger

after losing a lawsuit against the cab company).

More recently, the First Circuit decided a case on similar grounds. In F iumara v. Fireman's

Fund Insurance Co., 746 F.2d 87 (1st Cir.1984), the plaint iff sued insurers, insurance investigators,

and a testing laboratory, alleging that the defendants intentionally inflict ed emotional distress upon

him by their attempt to show that he had deliberately set a fire. The First Circuit held that an earlier

judgment in a suit filed against the insurers alone barred plaintiff's claims against the insurance

investigators and the testing laboratory:

The appellant is similarly foreclosed from raising his claims against the investigators and the

testing laboratory.... [G]iven the allegations of the federal complaint that

[defendants-appellees] were each and all acting as agents of the insurers when they committed

the putative misdeeds for which they have now been sued, they clearly qualify as persons in

privity with [the original defendants]. Thus, the res judicata defense is unmistakably available

to them.

Id. at 92 (citations omitted); s ee also Citibank, 904 F.2d at 1502–04; W. Prosser & R. Keeton, T he

Law of Torts § 69, at 449 n. 3 (5th ed. 1984) ("a judgment for A in an action brought against him by

C is res judicata as to B's vicarious liabilit y to C"); R estatement (Second) of Judgments § 51(3)

(1980) ("If the action is brought against the primary obligor and judgment is agai nst the injured

person, it extinguishes the claims against the person vicariously responsible if under applicable lawthe latter is an indemnitor whose liability arises only when the primary obligor is found liable to the

injured person.").

We faced a similar issue in Lubrizol Corp. v. Exxon Corp

., 871 F.2d 1279 (5th Cir.1989).

In 1982, Lubrizol brought suit in federal district court in New Jersey against Exxon for infringement

of Lubrizol's patents. Lubrizol also argued that two employees of Exxon filed false affidavits in the

action which misled Lubrizol's experts. The parties executed a settlement agreement in 1984, and the

district court dismissed the action with prejudice. In 1985, Lubrizol filed suit in the Southern District

of Texas against the two employees for fraud, based upon the alleged misinformation contained in

the affidavits filed in the New Jersey action. The employees moved to dismiss the case based on res

judicata, which the district court converted to a motion for summary judgment and granted in favor

of the employees.

On appeal, this court recognized that only the element of identity of parties was seriously in

dispute. Citing S

pector, Lambert, and Fiumara, we noted that most ot her federal circuits have

concluded that employer-employee or pri nci pal -agent relations may constitute grounds for application

of res judicata. Id. at 1288. We then summarized the state of the law in other circuits as follows:

The doctrinal basi s fo r t hese decisions has varied according to their fidelity to traditional

mutuality or privity concepts, but they share a common practical thread. Where a plaintiff has

sued parties in serial litigation over the same transaction; where plaintiff chose the original

forum and had the opportuni ty to raise all its claims relating to the disputed transaction in the

first action; 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

plaint iff's later suit continued to seek essentially similar relie f—t he courts have denied the

plaintiff a second bite at the apple.

Id. In Lubrizol, we declined to make any broad pronouncements as to the extent of the concept of

privity, holding o nly t hat , under the circumstances before us, the vicarious liability relationship

between Exxon and its two employees justified claim preclusion. Id. at 1289.

The cases which find t hat a vicarious liability relationship justifies a finding of privity are2 There are eight factors which are typically taken into account in determining if the successor

corporation is a "mere continuation" of the predecessor:

(1) Retention of the same employees;

(2) Retention of the same supervisory personnel;

(3) Retention of the same production facility in the same physical location;

(4) Production of the same product;

(5) Retention of the same name;

(6) Continuity of assets;

(7) Continuity of general business operations; and

(8) Whether the successor holds itself out as the continuation of the previous

enterprise.

Id. at 175. instructive here. Indeed, the derivative liability in an employer-employee relationship is analogous

to that of a corporati on and its successor under certain circumst ances. Generally , a corporation

which acquires the assets (but not the stock) of another corporati on is not obligated for the liabilit ies

of the corporati on from which the assets are acquired. M ozingo v. Correct Mfg. C orp., 752 F.2d

168, 174 (5th Cir.1985). There are four exceptions to this rule:

(1) When the successor expressly or impliedly agrees to assume the liabilities of the

predecessor;

(2) When the transaction may be considered a de facto merger;

(3) When the successor may be considered a "mere continuation" of the predecessor; or

(4) When the transaction was fraudulent.

Id.

The gravamen of Plaint iffs' suit is that SunAmerica is a "mere continuation" of Southmark,

and hence liable for the torts of its predecessor. In arguing this theory of recovery, Plaintiffs set forth

the following features shared by Southmark and SunAmerica. 2 Prior to the purchase date, Southmark3 Plaintiffs also contend that the purchase of Southmark's assets by SunAmerica was fraudulent.

This contention is intended to prove (as is their contention that SunAmerica is a "mere

continuation" of Southmark) that SunAmerica is derivatively liable for the torts of Southmark as

Southmark's successor corporation. Plaintiffs have, however, already obtained judgment (albeit a

consent judgment) against Southmark. Insofar as we have today held that this prior judgment

precludes Plaintiffs from relitigating their claims against SunAmerica, we need not address

SunAmerica's potential derivative liability. had thirty-four full-t ime employees; following purchase, SunAmerica had the same t hirty-four

employees, most of whom earned the same salary. Southmark had 1,375 registered representatives;

the records of all 1,375 representatives were "transferred" to SunAm erica following the purchase

date. SunAmerica operated with many of the same officers as Southmark, including the president,

treasurer, executive vice-president for marketing, and v ice-president for recruiting, each of whom

earned the same salary as at Southmark. In addition, for more than a year following the date of

purchase, SunAmerica operat ed it s securities home office using the same space, furniture, and

equipment as had Southmark.

We do not opine as to whether the similarit ies of or continuity between the two corporati ons

give rise to liability on the part of SunAmerica for the torts of Southmark as a "mere continuation"

of Southmark. Nor need we now, as we declined to do in L ubrizol, make any broad pronouncements

with regard to the outer reaches of privity. Rather, we hold that the relationship between Southmark

and SunAmerica is close enough to justify the application of res judicata so as to bar a second suit

based on the same cause of action as the first suit, particularly where, as here, the gravamen of the

Plaint iffs' second suit is that the defendant in that suit is a mere continuation of the defendant in the

first suit. Plaintiffs are therefore barred from bringing this action against SunAmerica.

Finally, Plaint iffs contend that the settlement agreement and resulting consent judgment were

procured by fraud. 3 Southmark, they argue, falsely claimed that it was insolvent, would soon file for

bankruptcy protection, and could not afford more than $105,000 in settlement of Plaint iffs' claims.

We note that Plaint iffs did not raise the issue of Southmark's alleged fraud in the pleadings below.

We usually will not consider arguments addressed for the first time on appeal. S ee NLRB v.4 Moreover, Plaintiffs may have challenged the propriety of the first judgment through Rule

60(b) of the Federal Rules of Civil Procedure, which provides that "the court may relieve a party

... from a final judgment, order, or proceeding for ... (3) fraud ..., misrepresentation, or other

misconduct of an adverse party." See also 11 C. Wright, A. Miller & E. Cooper §§ 2851–73; id.

at § 4415 n. 28 (recommending that claims of fraud concerning the first judgment be brought in

the first court by means of Rule 60(b)). Rule 60(b) allows the party seeking relief on grounds of

fraud or misrepresentation one year after entry of the judgment or order to file a motion for relief

under the Rule. Fed.R.Civ.P. 60(b). Plaintiffs did not file for relief from that judgment or order.

We note that this action was filed less than three months following the entry of the consent

judgment. Furthermore, claims against Pickens were still pending in the Jackson Division at the

time this action was filed. Pinkston–Hollar Constr. Servs., Inc., 954 F.2d 306 (5th Cir.1992).

We do note, however, that t his collateral attack on the validity of the prior judgment is

improper. While fraudulent procurement of a prior judgment may indeed preclude the application

of res judicata, the party claiming fraud should address this claim to the court which rendered the first

judgment. S ee 18 C. Wright, A. Miller & E. Cooper § 4415, at 129; R estatement (Second) of

Judgments § 78–82 (1981) (discussing preference for proceeding init ially in the court which rendered

the first judgment); s ee also id. at § 26, comment j (suggesting that the plaint iff who claims that the

defendant's fraud or misrepresentation prevented full resolution of that action must apply to the first

court for permission to entertain the second action). 4

III. CONCLUSION

We hold that Plaint iffs are barred from relitigating these claims based on the principle of res

judicata. On this basis, we AFFIRM the district court's award of summary judgment in favor of

SunAmerica.