Opinion ID: 444219
Heading Depth: 1
Heading Rank: 2

Heading: Res Judicata--The Parsons

Text: 12 The district court found that the Parsons attempted to split a single cause of action by asserting a BHCA violation in federal court and claims of fraud and commercial unreasonableness in state court. In both actions the plaintiffs claimed that the Bank had deliberately put Parsons-Montgomery in a position where it could not pay its debts. The Bank then allegedly promised further credit only on the condition that the Parsons allow Michael Orange, a valued customer of the Bank, to take control of the company. The Parsons claimed that they had no choice but to relinquish control of their company. After Orange decided that the management arrangement was unsatisfactory, he and the Bank allegedly devised a plan whereby the Bank would foreclose on the company's assets and Orange's company would purchase the assets at the foreclosure sale. These activities were claimed to be a violation of the BHCA in federal court. The same activities were the basis for the fraud claims in state court. The district court also found that the claim that the foreclosure sale was made at a commercially unreasonable price appeared in the federal case as evidence of damages and in the state case as a violation of the UCC. 13 In an opinion granting the Bank's motion for judgment n.o.v., the federal court made several important findings of fact in addition to holding that the Bank did not violate the BHCA. The plaintiffs in the BHCA action had attempted to prove that the Bank, as a condition of an extension of credit, required the Parsons to relinquish control and ownership of their business to Orange. The federal court found as a matter of fact that the Bank did not require the Parsons to give up control or ownership of their company. Although the Bank introduced Orange to Parsons as a potential purchaser of the company, Parsons and Orange reached an agreement independently of the Bank. The agreement provided that Orange was to manage the business in exchange for a fee and a stock option. The court found that the stock option was included in the deal, not as a method by which Orange could wrench ownership away from the Parsons, but simply as a means of compensation because cash flow problems prevented the company from paying Orange entirely in cash. In the final analysis, the district court found that the Bank had not promised the Parsons anything, nor had it forced the Parsons to take any action. It was not until the actual foreclosure and sale of assets, a normal procedure, that the Parsons had to give up ownership of the company's assets, which resulted in Parsons-Montgomery being adjudicated an involuntary bankrupt. It is undisputed that the Bank, at all relevant times, had a right to proceed with this foreclosure. 14 In view of these findings, the district court in this injunction proceeding found that its earlier judgment was res judicata as to the Parsons' state claims of fraud and commercial unreasonableness. 15 The principle of res judicata makes a final, valid judgment conclusive on the parties, and those in privity with them, as to all matters, fact and law, that were or should have been adjudicated in the proceeding. Woods Exploration & Producing Company v. Aluminum Company of America, 438 F.2d 1286, 1312-13 (5th Cir.1971), cert. denied, 404 U.S. 1047, 92 S.Ct. 701, 30 L.Ed.2d 736 (1972), (quoting 1B Moore, Federal Practice p 0.405 at 6240). 8 16 Both Parsons-Mobile and the Parsons were parties to the federal BHCA action, and it is clear that the judgment in that action was a final judgment on the merits. As to these parties, therefore, the only issue is whether the claims made in the state court proceeding involve matters of fact or law that were or should have been adjudicated in the federal BHCA action.
17 Although the plaintiffs in the BHCA action did not raise the claim of common law fraud, the district court held that they should have raised it. The same primary wrong was alleged in both actions: the Bank wrongfully required the Parsons to give up management and ownership of their business. The damages caused by this wrong were the same in both the federal and state actions. 18 The standard applicable to the present case was clearly set forth in Woods Exploration. 9 There the court explained that res judicata applies to separate claims that are simply alternative grounds of recovery for the same basic cause of action. The court stated: 19 The principle of res judicata, enforceable by injunction, would thus preclude relitigation in the state following this federal judgment if the state and federal counts involve substantially the same wrongs measured by similar standards of liability so that recovery in the federal suit will have compensated plaintiffs for the total harm suffered. See Note, Parallel State and Federal Remedies, 71 Harv.L.Rev. 513, 523-24 (1957). Alternatively, even if different standards of recovery existed in the state and federal actions, res judicata would be applicable if plaintiffs were afforded an opportunity to allege the state grounds which constituted the same cause of action in the federal proceedings. See Restatement, Judgments Sec. 62. Focusing on the latter test, we think that the doctrine of pendent jurisdiction, see Hurn v. Oursler, 1933, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148, afforded plaintiffs opportunity for joinder. 20 Woods Exploration, 438 F.2d at 1315 (footnote omitted). See Harper Plastics, Inc. v. Amoco Chemicals Corporation, 657 F.2d 939 (7th Cir.1981) (prior judgment is conclusive as to any ground of recovery which might have been presented); see also Nilsen v. The City of Moss Point, Miss., 701 F.2d 556, 560 (5th Cir.1983) ([O]ne who has a choice of more than one remedy for a given wrong, ... may not assert them serially, in successive actions, but must advance all at once on pain of bar.). 21 The Parsons' fraud claim was simply an alternative ground of recovery for the acts that were allegedly a violation of the BHCA. The facts forming the basis of the fraud claim were fully adjudicated in the federal BHCA action. As the district court noted, recovery under the BHCA claim would have compensated the Parsons for the total harm suffered. And under the doctrine of pendent jurisdiction, the Parsons had an opportunity to pursue their claim of fraud in federal court. The district court was correct in holding that the judgment in the federal action was res judicata as to the Parsons' fraud claim in the state court.
22 Unlike the fraud and BHCA claims, which were merely alternative grounds of recovery for the same wrongdoing, the UCC claim alleges a separate and distinct wrongdoing by the Bank. The UCC claim involves the actual foreclosure sale and alleges the Parsons were wronged by the receipt of an unfairly low price for their assets; whereas, the BHCA and fraud claims involved a wrong allegedly committed during the events leading up to that sale. Nevertheless, the district court correctly held that the UCC claim could have and should have been raised by the Parsons in the federal BHCA action. 23 Allegations that the sale was commercially unreasonable were included in the federal BHCA complaint as part of the proof of damages. That is, the Parsons alleged that the defendants' wrongful conduct prior to the sale resulted in the Parsons not receiving a fair price for their company assets at the foreclosure sale. However, the reasonableness of the sale price was never actually adjudicated in the BHCA action. The district court bifurcated the trial to handle the question of liability first, and then, if necessary, address damages. Because the damages issue was never reached, evidence of an insufficient price was never presented to the jury. 24 In state court, the Parsons claimed that the time and terms of the sale were commercially unreasonable under UCC standards. See ALA.CODE Secs. 7-9-504, 7-9-507 (1975). 10 UCC section 9-504, which governs the resale of collateral, requires that the creditor send notice and that every aspect of the sale be commercially reasonable, including the method, manner, time, place and terms. The federal court in the BHCA action found that the Parsons waived the notice requirement, leaving open only the question of whether the actual sale was commercially unreasonable. This issue amounts simply to a claim that the price at the sale was insufficient. The 'method, manner, time, place and terms' tests are really proxies for 'insufficient price,' and their importance lies almost exclusively in the extent they protect against an unfairly low price. White & Summers, Uniform Commercial Code, Sec. 26-9, at 1109 (2d ed. 1980). 11 25 The issue is whether the BHCA proceeding involves the same cause of action as the Parsons asserted in their UCC claim in the state court. We believe the district court was correct in holding that it does. The bar of res judicata extends not only to the precise legal theory presented in the previous litigation, but to all legal theories and claims arising out of the same 'operative nucleus of fact.'  Olmstead v. Amoco Oil Co., 725 F.2d 627, 632 (11th Cir.1984). The events leading up to the foreclosure sale and the sale itself involved a series of connected transactions out of which the Parsons' action arose. This is partially evident from the fact that the Parsons found it necessary to allege the facts surrounding the foreclosure sale in order to prove damages in the BHCA action. Although the UCC claim and the BHCA claim alleged distinct acts of wrongdoing, the facts underlying those claims arise out of the same nucleus of operative facts. This is true regardless of what the UCC claim alleges was the cause of the unreasonably low price. A claim that the foreclosure sale violated the UCC should have been raised by the Parsons in the federal action. 26 The fact that the conduct of the foreclosure sale and the sufficiency of the price were not adjudicated in the BHCA action does not affect the result. Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767 (1979). Moreover, had the Parsons asserted UCC commercial unreasonableness as a theory of liability in the BHCA action, rather than merely alleging the facts of the sale as proof of damages, the conduct of the sale would have been adjudicated. 27 The district court was also correct in holding that the Parsons could have raised the state law UCC claim in the federal BHCA action under the doctrine of pendent jurisdiction. 28 As to the Parsons and Parsons-Mobile, none of the district court's fact findings necessary to the determination of res judicata were clearly erroneous and the court did not err in its conclusion of law. We must now turn to the issue of whether the district court abused its discretion by enjoining the appellants from enforcing the state court judgment. 29