United States Court of Appeals,

Fifth Circuit.

No. 91–8446.

SUCCESS MOTIVATION INSTITUTE OF JAPAN LTD., et al., Plaintiffs–Appellants,

v.

SUCCESS MOTIVATION INSTITUTE INC., et al., Defendants–Appellees.

July 27, 1992.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, REYNALDO R. GARZA, and JONES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Plaintiffs-appellants Success Motivation Institute of Japan, Ltd. (SMIJ) and Iris Lombardi,

et al. (Lombardi) sued Success Motivation Institute, Inc., et al. (SMI) on several grounds arising out

of a purported sale of stock from Lombardi to SMI. The district court granted the defendant's motion

for summary judgment based on res judicata of a Japanese judgment. Finding the district court erred

in applying the res judicata rules of the Fifth Circuit, we reverse and remand.

I.

In 1965, Michael Lombardi purchased an exclusive franchise for sale and distribution in Japan

of motivational records and literature produced by Success Motivation Institute, Inc., currently called

Success Motivation International, Inc., principally owned by Paul J. Meyer (Meyer). Mr. Lombardi

formed Success Motivation Institute of Japan (SMIJ) and served as franchisee for Japan until his

death in August, 1983.

Mrs. Lombardi assumed operati on of SMIJ after her husband's death. Mrs. Lombardi alleges

t hat Meyer pressed her to invest in a real estate project, demanded that the royalties be doubled,

threatened to open a competing bus iness, demanded that territories be transferred to SMI, etc.

Lombardi also alleges that she was contacted by Meyer and informed that he would not renew theSMIJ franchise agreement but would cancel it and would set up a competing company, put out new

programs, take SMIJ's agents and distributors, and put Mrs. Lombardi out of business.

Mrs. Lombardi, after meeting with advisors, believed she stood to lose everything and had

no alt ernat ive o ther than to sell the company to Meyer. Mrs. Lombardi's advisors negotiated a

Buy–Sell Agreement with Meyer and his attorney under which Mrs. Lombardi was to sell her stock

in SMIJ and SMI Far East to Meyer. The agreement executed by the parties provided for a purchase

price of $2,250,000 with $250,000 in cash to be paid down and the balance to be paid by promissory

note for $2,000,000 at 10% interest payable monthly over a term of 15 years. Several additio nal

matters were yet to be worked out, but Mrs. Lombardi signed the agreement on December 29, 1983.

Mrs. Lombardi alleges that, as of May, 1984, Meyer made no effort to resolve any of the points he

had promised to settle nor had he made the down payment or any of the inst allment payments called

for by the agreement. Mrs. Lombardi physically attempted to take the co mpany back on May 26,

1984.

Meyer sought injunctive relief in Japanese court, which was granted on October 22, 1984,

order ing Mrs. Lombardi to cease interference with the business of SMIJ. Meyer then filed suit in

Japanese court to have Meyer, Baxter, and Arida confirmed as directors of SMIJ. After a trial, the

Tokyo district court confirmed on April 14, 1987, that Meyer, Baxter, and Arida were directors and

that Mrs. Lombardi was not. The Japanese court enjoined Mrs. Lombardi from interfering with the

operations of SMIJ.

While the Japanese litigation was pending, Mrs. Lombardi and the other plaint iffs initiated this

suit in the United States District Court for the Western District of Texas against SMI, Meyer, and

Baxter for recision of the buy-sell agreement, restitution of stock ownership in SMIJ, a declaratory

judgment, and damages for loss of value in the stock in the business, along with exemplary damages.

The plaint iffs based their cause of action on claims of duress, brea ch of contract, fraud and undueinfluence, unconscionability, breach of fiduciary duty, waste and mismanagement, and interference

with contractual relations. Defendants counter-claim against Mrs. Lombardi and her advisors for

breach of contract, conversion, trespass, and interference with contractual relations.

The defendants argued in the district court that summary judgment was proper because there

was no genuine issue of any material facts and that they were entitled to a judgment as a matter of

law. They also argued that the prior proceeding in the Japanese court conclusively settled the claims

that were at issue in this case and established all material facts in their favor, and that the plaintiff's

claims were, therefore, barred by res judicata or collateral estoppel. The district court granted the

summary judgment motion of defendants without specifying reasons. This court thereafter remanded

the case for a more definite statement why the district court granted th e mot ion for summary

judgment.

The district court, relying on two previous decisions of the Northern District of Texas,

determined that the Fifth Circuit rules of res judicata applied and that the Japanese judgment barred

further consideration of the plaintiff's claim in its court. Plaintiffs appeal, we reverse and remand.

II.

On the original appeal from t he district court's grant of summary judgment, this court

remanded the case because it was "unclear whether the district court based its decision regarding the

defendants' summary judgment motion on the absence of any material fact issue in the case or whether

the court thought th e res judicata effect of the Japanese judgment barred the plaint iffs' present

claims." The dist rict court clarified its order by providing that it "granted Defendants' motion for

summary judgment on the basis that the Japanese judgment was res judicata and that it precluded

further litigation in this case." The district court relied on H unt v. B.P. Exploration Co. (Libya)

LTD., 492 F.Supp. 885 (N.D.Tex.1980) [ Hunt I ], and Hunt v. B.P. Exploration Co. (Libya) LTD.,

58 0 F.Supp. 304 (N.D.Tex.1984) [ H unt II ], for the proposition that the Fifth Circuit rules of resjudicata applied and that the Japanese judgment barred further consideration of the plaint iffs' claims

in the district court. It is with this holding that plaintiffs take issue.

Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) g overns the

recognition of foreign country judgments when jurisdiction is based on diversity. B anque Libanaise

Pour Le Commerce v. Khreich, 915 F.2d 1000, 1003 (5th Cir.1990). E rie applies even though some

courts have found that thes e suit s necessarily involve relations between the U.S. and foreign

governments, and even though some commentators have argued tha t the enforceability of these

judgments in the courts of the United States should be governed by reference t o a general rul e of

federal law. Khreich, 915 F.2d 1003 n. 1.

Here, the district court relied on Hunt I and Hunt II in determining that the Fifth Circuit rules

of res judicata should apply. In H unt I, the court recognized that in a diversity action, Erie requires

that a federal district court to apply the law of the state. H unt I, 492 F.Supp. at 892. The court also

recognized that "[i] n Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020,

1021, 85 L.Ed. 1477 (1941), the Supreme Court held that Erie required the conflict of laws rules to

be applied in a federal court must conform to those that would be applied in the court of the forum

state." H unt I, 492 F.Supp. at 892. Also, the court recognized that both federal and state courts, in

the absence of federal preemptive ac t io ns, "have held that state law governs the recognition and

enforcement of foreign-country judgments." I d. (citations omitted). The court, thereafter, went on

to find that although the law of Texas was to govern, Texas law was uncertain and determined that

the law of Texas was not the sole reference. Id. In Hunt II, the district court, although noting that

the judgment at issue would be enforceable in the same manner as the judgment of a sister state would

be under Texas law, went on to apply the Fifth Circuit rule of res judicata. Hunt II, 580 F.Supp. at

310.

Neither Hunt I nor Hunt II are binding on this court, but we are bound by Erie, Klaxon, and1 The issue of which state's law should apply as a theory of recovery ( see Shelak, supra, Texas

or Ohio law) is different from whether federal or state law should be applied in a diversity action.

"[I]t is not one of the parties seeking to advance a new theory, rather, it is this court, in fulfillment

of its duty to apply the correct law, that is seeking to put the case back on the right track."

Valdak Corp., 468 F.2d at 334 (emphasis original, footnote omitted). this court's previous opinion in Khreich. Therefore, not only the recognition of the foreign country

judgment, but also the preclusive effect of that judgment as to this case should be determined under

Texas law.

III.

Appellees argue that Lombardi, et al. may not argue for the first ti m e on appeal that the

district court should have applied the law of one jurisdiction rather than the law of another. S helak

v. White Motor Co., 581 F.2d 1155, 1160 (5th Cir.1978), citing Empire Life Insurance Co. of

America v. Valdak Corp., 468 F.2d 330, 334 (5th Cir.1972) and Glona v. American Guaran ty &

Liability Insurance Co., 379 F.2d 545, 546 (5th Cir.1967). However, this issue is not, per se, before

this court. 1

The issue presented is not whe t her t he law of Japan should or should not be applied to

determine the preclusive effect of the Japanese judgment. The issue presented is whether the district

court should have applied federal or state law. This circuit has previously provided what law is to

govern in this instance, see Khreich, supra, and the Supreme Court's decision in Erie has been with

us for over 50 years. The district court in H unt I recognized that both Erie and Klaxon require it to

look to the law of Texas for the recognition of foreign court judgments. H unt I, 492 F.Supp. at 892.

It does not appear that the district court even considered Texas law, but instead erroneously relied

on Hunt I and Hunt II for the proposition that the res judicata law of the Fifth Circuit applies. Texas

law should have been applied and its law should be considered to determine what preclusive effect

the Japanese judgment should be given. On remand, the Texas law of r es judi cata and collateral

estoppel must be considered to determine what effect the Japanese judgment has on this cause of

action.IV.

For the foregoing reasons, the judgment of t he district court is REVERSED and

REMANDED.