Opinion
Civil Action No. 3:01-CV-0842-D.
April 29, 2004
MEMORANDUM OPINION AND ORDER
In this suit arising from a dispute over ownership rights in the now-bankrupt Network Staffing Services, Inc. ("NSSI"), the court must decide whether plaintiff's remaining claim for conversion is barred by res judicata. The court holds that it is.
I
Because the parties are familiar with the facts of this and several related cases arising from this dispute regarding ownership of NSSI, the court will focus on the procedural history necessary to understand today's disposition of the claims in this case. Plaintiff Stasan, Inc. ("Stasan") brought this action against defendants NSSI, Michael P. Logal ("M. Logal"), and Deborah V. Logal ("D. Logal") to recover for conversion and to obtain declaratory relief and specific performance arising from a dispute concerning Stasan's rights as an alleged shareholder of NSSI. Stasan maintained that defendants had wrongfully converted Stasan's shareholder interest. It sought a declaratory judgment concerning its shareholder status, and it sued for specific performance to compel defendants to comply with a provision of the NSSI shareholder agreement that required that shares be offered to shareholders before they were sold.
Stasan and defendants moved for summary judgment. Stasan filed its motion for partial summary judgment on February 4, 2002. The Logals and NSSI filed a cross-motion for summary judgment on March 11, 2002. Because Stasan had been involved in prior litigation with defendants, see Stasan, Inc. v. Logal, Civil Action No. 3:99-CV-2796-G (N.D. Tex. 2001) (Fish, J.) (" Stasan I"), aff'd, 48 Fed. Appx. 917 (5th Cir. Sept. 18, 2002) (per curiam), the parties had appealed the judgment in that suit, and the appeals were scheduled for oral argument, the court on May 29, 2002 abated rulings on the motions. After the Fifth Circuit affirmed Stasan I, the court on October 30, 2002 directed the parties — except NSSI, which had filed for bankruptcy on July 1, 2002 — to advise the court whether they desired to present supplemental briefing and to have additional time to pursue settlement. In their November 18, 2002 status report, the parties stated they desired neither.
On January 29, 2003 the court conducted a status conference with counsel for Stasan, the Logals, and the chapter 11 trustee for NSSI and directed that they file a status report so that the court could determine — in view of NSSI's bankruptcy and the possibility that no equity interest remained — whether rulings were necessary on any parts of the pending motions. After considering their February 12, 2003 joint status report, the court by March 31, 2003 order terminated the motions for statistical purposes, removed the case from the trial docket, and directed the parties to file quarterly joint status reports so that it could determine whether the motions should be statistically reopened and the case assigned to a trial docket. The court considered periodic status reports filed May 1, 2003 and August 4, 2003.
Stasan sought reconsideration of the order on April 14, 2003, and the court denied the motion on May 12, 2003.
On September 5, 2003 the court conducted another status conference and directed that the joint status reports continue at least through November 1, 2003. The parties filed a joint status report on November 12, 2003.
On March 19, 2004 the court conducted another status conference. In an order filed the same day, it directed the parties to file a joint status report that contained the parties' views concerning what parts of the case remain to be litigated, who has the right to assert any claim that remains, what grounds of the parties' pending motions require a ruling, and the current status of, and prospects for, settlement. The parties filed the joint status report on April 20, 2004.
In the parties' current report, Stasan maintains that its conversion cause of action against the Logals is viable and that the court should rule on the pending summary judgment motions that relate to this claim, because it is not derivative and not shared equally by all NSSI shareholders. Regarding its claims for declaratory judgment and specific performance, Stasan acknowledges that NSSI's bankruptcy and liquidation have rendered moot the monetary value of the claims. It asks that, considering the pendency of a separate legal malpractice lawsuit arising from the underlying facts of the instant suit, any determination or dismissal of the claims be without prejudice, because the facts of this suit are at the core of that litigation. Stasan also asks that the court stay the present case because, if it prevails in the malpractice suit, this case will be moot, and Stasan will voluntarily dismiss it. Stasan does not waive its right to continue this lawsuit if it loses the malpractice case, and it asks that the court rule on both outstanding summary judgment motions if the case is not stayed.
Stasan alleges that stock transfers involving NSSI stock were invalid, that a written consent between M. Logal and another person was invalid, and that issuance of stock to M. Logal was invalid because the stock should have been made available to NSSI and to other shareholders before being sold to a third party. See P. Compl. ¶¶ 56-81.
Stasan asks the court to order defendants to comply with the provisions of a shareholder agreement requiring that defendants make their shares available to the corporation and to the remaining shareholders of NSSI before selling them to other third parties, such as M. Logal. See P. Comp. ¶¶ 82-89.
Stasan, Inc v. Arter Hadden, LLP, in the United States District Court for the Southern District of Florida, Civil Action No. 01-7258.
The Logals maintain that the confirmed NSSI liquidation plan has left NSSI's stock valueless. They assert that all of Stasan's claims against them are moot because, as Stasan stated in the parties' November 18, 2002 status report, this action concerns the status of NSSI's shareholders and their respective ownership. The Logals request that, if the court agrees with Stasan that the conversion claim is not moot, it rule on their summary judgment motion as it relates to the conversion claim and, if their motion is denied, set the case for trial at the earliest possible date.
NSSI contends that NSSI Liquidating Trust is the successor in interest to all lawsuits and claims held by NSSI. It posits that all claims asserted against NSSI are moot and should be dismissed without prejudice. NSSI contends that any cross-claims or counterclaims that it holds against Stasan or the Logals should be dismissed without prejudice to being appropriately refiled. It takes no position concerning claims by Stasan against the Logals that relate to specific harm incurred by Stasan, but it reserves the right to intervene if it discovers that claims asserted by Stasan are derivative claims that NSSI holds. NSSI does not assert that claims Stasan currently brings in its complaint are derivative. To the extent that Stasan's claims relate to damages to NSSI shareholders generally, NSSI reserves any derivative causes of action and requests that they be dismissed without prejudice to being appropriately asserted.
II
Having considered the parties' most recent status report and the history of this case, the court concludes that it should address the parties' pending summary judgment motions and dismiss the claims that have been mooted by NSSI's bankruptcy. The Logals have not demonstrated that Stasan's conversion claim is entirely mooted by NSSI's bankruptcy and the liquidation of the company. Stasan asserts that the Logals deprived it of an opportunity to sell its NSSI shares at a premium by, inter alia, refusing to relinquish any control over NSSI, and that their actions resulted in taking a frivolous position that Stasan was not a shareholder. P. Compl. ¶¶ 35-36. Accordingly, the conversion claim remains to be addressed.Stasan's declaratory judgment and specific performance claims, both of which seek relief concerning now-valueless NSSI stock, are dismissed without prejudice as moot. Because Stasan's February 4, 2002 motion for partial summary judgment relates only to its now-dismissed declaratory judgment claim, the court denies the motion without prejudice as moot. Stasan's action against NSSI is also dismissed without prejudice as moot.
III
The court now considers whether res judicata precludes Stasan from suing for conversion.
The Logals also rely on the defense of collateral estoppel and argue that Stasan cannot prevail on its conversion claim as a matter of law. The court need not address these arguments.
A
"The preclusive effect of a prior federal court judgment is controlled by federal res judicata rules." Ellis v. Amex Life Ins. Co., 211 F.3d 935, 937 (5th Cir. 2000). Res judicata is an affirmative defense as to which the Logals will have the burden of proof at trial. Therefore, to obtain summary judgment, they "must establish `beyond peradventure all of the essential elements of the . . . defense.'" Bank One, Texas, N.A. v. Capital Associates Int'l, Inc., 2000 WL 680311, at *3 (N.D. Tex. May 23, 2000) (Fitzwater, J.) (quoting Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.)), aff'd, 254 F.3d 71 (5th Cir. 2001) (unpublished table decision).Res judicata bars all claims that were or could have been advanced in support of a cause of action on the occasion of its former adjudication. Nilsen v. City of Moss Point, Miss., 701 F.2d 556, 560 (5th Cir. 1983) (en banc). The doctrine is applied according to a four-part test. "For a prior judgment to bar an action on the basis of res judicata, the parties must be identical in both suits, the prior judgment must have been rendered by a court of competent jurisdiction, there must have been a final judgment on the merits and the same cause of action must be involved in both cases." In re Intelogic Trace, Inc., 200 F.3d 382, 386 (5th Cir. 2000) (quoting Nilsen, 701 F.2d at 559). It is undisputed that the parties in the present case and Stasan I are the same, that the court that rendered judgment in Stasan I is a court of competent jurisdiction, and that the judgment in Stasan I is final. The court need therefore decide only whether the "same cause of action" is involved in Stasan I and in the instant case.
In determining whether the fourth element is satisfied, the court utilizes the transactional approach of the Restatement (Second) of Judgments. Ellis, 211 F.3d at 938; Intelogic, 200 F.3d at 386 n. 3 (5th Cir. 2000). The transactional approach provides:
(1) When a valid and final judgment rendered in an action extinguishes the plaintiff's claim pursuant to the rules of merger or bar . . . the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.
(2) What factual grouping constitutes a "transaction", and what groupings constitute a "series", are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage.
Restatement (Second) of Judgments 24. The critical issue is not the relief requested or the theory asserted. The question is instead
whether plaintiff bases the two actions on the same nucleus of operative facts. The rule is that res judicata "bars all claims that were or could have been advanced in support of the cause of action on the occasion of its former adjudication, . . . not merely those that were adjudicated."In re Howe, 913 F.2d 1138, 1144 (5th Cir. 1990) (footnotes omitted) (quoting Nilsen, 701 F.2d at 560). "If the factual scenario of the two actions parallel, the same cause of action is involved in both. The substantive theories advanced, forms of relief requested, types of rights asserted, and variations in evidence needed do not inform this inquiry." Agrielectric Power Partners, Ltd. v. Gen. Elec. Co., 20 F.3d 663, 665 (5th Cir. 1994).
B
The Logals contend Stasan's conversion claim is barred by res judicata based on the final judgment in Stasan I because Stasan alleges in the present case that, from August 1999 through February 2001, the Logals converted Stasan's stock "by interfer[ing] with [its] rights incident to its ownership of stock in NSSI," P. Compl. ¶ 51; see id. ¶ 54, and Stasan I involved the validity of Stasan's ownership of NSSI stock. It is pellucid that Stasan I and the instant case are based on the same nucleus of operative facts. Both relate to a protracted and contentious dispute between Stasan and the Logals over ownership rights in NSSI stock. See Southmark Props. v. Charles House Corp., 742 F.2d 862, 871 (5th Cir. 1984) ("Although appellants' present claim alleges various other acts of wrongdoing by Southmark, all of those acts are alleged to have produced or resulted from, and were integrally related to, the sale of the property to Southmark. They all involved a `common nucleus of operative facts.'"); Howe, 913 F.2d at 1144 n. 10 (noting that under transactional test, same action includes all remedial rights of plaintiff against defendant growing out of relevant transaction or series of transactions).
To avoid the preclusive effect of res judicata, Stasan responds that, in Stasan I, the Logals sued for a declaration that Stasan's shares in NSSI were void under Texas law because Stasan gave no consideration for the stock in July 1994, and it was not until February 2001 that Judge Fish determined that Stasan's 300 shares of NSSI were valid and that Stasan was a valid NSSI shareholder. Stasan reasons that because Judge Fish did not determine whether Stasan was a shareholder until shortly before the Stasan I trial, it would have been impossible to allege that the Logals had converted Stasan's rights incident to its ownership of stock in NSSI.
Judge Fish is now Chief Judge of this court.
Stasan also asserts that a conversion claim would have been a permissive counterclaim. The Logals filed suit in December 1999 seeking a declaratory judgment that Stasan's shares in NSSI were void under Texas law because Stasan gave no consideration for the stock in July 1994. Stasan asserts that the only compulsory counterclaim was one for declaratory relief that Stasan was a valid NSSI shareholder that provided consideration for its shares. It contends that its conversion claim does not relate to the subject matter of the Logals' original claim. In its reply brief in support of its own motion for partial summary judgment, Stasan elaborates on this argument and contends that, under Fifth Circuit authority, a claim that arises only after the date of the answer in the original suit is not barred by res judicata, and a counterclaim acquired by the defendant after it has answered is not considered compulsory, even if it arises out of the same transaction as does the plaintiff's claim.
Stasan's own motion seeks partial summary judgment establishing the merits of its declaratory judgment action. Although the court has denied the motion as moot, see supra at § II, it will nevertheless consider this argument. In the Logals' reply brief in support of their cross-motion for summary judgment, they have attempted to refute Stasan's reliance on a case it cites in its reply brief in support of its own motion for partial summary judgment but not in its brief in opposition to the Logals' motion. Because the Logals have addressed in their reply brief in support of their own motion a case that Stasan cites in its reply brief in support of its motion, the court will do so as well.
C 1
Stasan's first argument lacks force. The fact that in Stasan I Judge Fish did not decide until February 2001 that Stasan's 300 shares of NSSI were valid and that Stasan was a valid NSSI shareholder did not prevent Stasan from asserting that it owned the shares, that the Logals had deprived it of rights incident to ownership, and that they were liable for conversion. Stasan assumes that it was required as a matter of law to obtain an adjudication that it owned the NSSI stock before it could sue for conversion. This is not a requirement, however, of Texas law.
Indeed, because ownership of property or a superior right to possession of the personal property at the time of conversion is material as bearing on the issue of conversion, that question is inextricably intertwined with the determination of conversion and the books are replete with cases in which both questions are determined in a single case. Rogers v. Ricane Enters., Inc., 930 S.W.2d 157, 167 (Tex.App. 1996, no writ) (emphasis added) (citations omitted). Stasan also relies on the Logals' filing of Stasan I to support its conversion claim. See id. at ¶ 41 ("In December, 1999, NSSI instituted an action against STASAN seeking a declaration that STASAN was not a shareholder of NSSI."). Accordingly, a conversion cause of action could have been asserted in Stasan I even before the ownership issue was resolved on the merits.
Stasan's conversion claim is based on Texas law. See P. Resp. Br. at 5-9.
Although Stasan refers in ¶ 41 of its complaint to NSSI's having filed the lawsuit, the court has found no indication of any suit filed in December 1999 other than the one brought by the Logals, to which NSSI was later added as a plaintiff. NSSI and the Logals filed suit against several parties, including Stasan (denominated as "Statsan Marketing, Inc." because this name was used on the NSSI stock certificate), but this occurred in June 1999. See Network Staffing Servs. v. Blumberg, Civil Action No. 3:99-CV-1308-G. Moreover, as asserted in ¶ 41, in Stasan I the Logals sought a declaration that Stasan was not a shareholder of NSSI. Paragraph 44 corroborates that this refers to Stasan I because it states that Stasan asserted a counterclaim seeking a declaration that it was an NSSI shareholder. And in its brief in opposition to the Logals' cross-motion for summary judgment, Stasan states that "Defendants" filed the suit on December 10, 1999, see P. Resp. Br. at 3, and that "M. LOGAL and D. LOGAL" sought a declaration on December 10, 1999 that Stasan's shares in NSSI were void under Texas law, id. at 2.
In ¶ 48 of its complaint, Stasan alleges that "Defendants' above actions converted STASAN's shareholder interest in NSSI." P. Compl. ¶ 48. Accordingly, fairly read, Stasan asserts that the filing of Stasan I was a constituent act of conversion.
2
Nor can the court agree with Stasan's second argument. Stasan maintains that it was not required in Stasan I to assert conversion because the claim would have been a permissive rather than compulsory counterclaim. A counterclaim is compulsory "if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction." Fed.R.Civ.P. 13(a). Stasan argues that its conversion cause of action does not arise out of the transaction or occurrence that is the subject matter of the Logals' claim.The test for whether a claim is compulsory is
(1) whether the issues of fact and law raised by the claim and counterclaim largely are the same; (2) whether res judicata would bar a subsequent suit on defendant's claim absent the compulsory counterclaim rule; (3) whether substantially the same evidence will support or refute plaintiff's claim as well as the defendant's counterclaim; and (4) whether there is any logical relationship between the claim and the counterclaim. An affirmative answer to any of the four questions indicates the claim is compulsory.Park Club, Inc. v. Resolution Trust Corp., 967 F.2d 1053, 1058 (5th Cir. 1992) (emphasis added) (internal quotation marks omitted) (citing Plant v. Blazer Fin. Svcs., Inc. of Ga., 598 F.2d 1357, 1360-61 (5th Cir. 1979)). "The test which has commended itself to most courts, including [the Fifth Circuit], is the logical relation test. The logical relation test is a loose standard which permits a broad realistic interpretation in the interest of avoiding a multiplicity of suits." Plant, 598 F.2d at 1361 (citations and internal quotation marks omitted).
Even assuming that none of the other three requirements is met, there is at least a logical relationship between the Logals' declaratory judgment action in Stasan I and Stasan's conversion claim in the present case. Although the Logals asserted in Stasan I that Stasan had obtained shares of NSSI stock in July 1994 without contributing valid consideration, this was simply the legal basis on which they relied to challenge Stasan's claim to be an NSSI shareholder. Stasan's conversion claim is logically related because it complains that, from August 1999 until February 2001, the Logals undertook a series of actions — including filing Stasan I, see Compl. ¶¶ 41, 48 — to support their assertion that Stasan was not an NSSI shareholder and thereby interfered with Stasan's rights incident to ownership. According to Stasan, the filing of the lawsuit was one of several acts of interference that deprived it of its rights and thereby converted its stock ownership. The court thus disagrees with Stasan's cramped view that the only compulsory counterclaim triggered by the Logals' declaratory judgment action in Stasan I would have been a declaratory relief counterclaim that asserted that Stasan was a valid shareholder and that it had given consideration for its NSSI shares.
If the court misunderstands the record on this point, see supra at note 9, there is still a logical relationship between the Logals' claim in Stasan I and Stasan's conversion claim.
Nor can the court agree with Stasan that its conversion claim against the Logals arose after it answered the complaint in Stasan I. Assuming arguendo that Stasan can recover for conversion on the grounds alleged, its cause of action had already arisen when it answered the complaint. Under Texas law
[c]onversion is an act of dominion and control wrongfully exerted over another's personal property and inconsistent with that person's right in the property. An act of conversion does not have to be an actual manual taking but merely an act that is such active interference with the owner's right of property or control as to deprive him of its free use and enjoyment.Pierson v. GFH Fin. Servs. Corp., 829 S.W.2d 311, 314 (Tex.App. 1992, no writ) (citations omitted). Stasan avers that the Logals' interference commenced at least by August 1999 — a date before Stasan I was filed — when they took the position that Stasan was not an NSSI shareholder. See P. Compl. ¶ 38. It relies, inter alia, on the fact that they "instituted" (i.e., filed) Stasan I to support its conversion claim. See id. ¶¶ 41, 48. Stasan I was filed before Stasan answered the complaint. This means that, according to Stasan, the Logals had already committed acts of interference with its rights incident to its ownership of stock in NSSI, and thereby converted its NSSI stock, before Stasan answered the Stasan I complaint.
As noted above, res judicata only applies if Stasan could have brought the conversion claim in Stasan I. See Nilsen, 701 F.2d at 560. To the extent Stasan is arguing that it could not have brought a conversion claim, the court disagrees. Stasan complains of acts of conversion undertaken "[f]rom August 1999 through February, 2001," a period that overlaps by about 15 months the ongoing Stasan I litigation. Stasan alleges that, beginning in May 1999 — i.e., approximately seven months before the Logals filed suit — the Logals disregarded its shareholder rights. See P. Compl. ¶ 34. It asserts that they deprived Stasan of an opportunity to sell its NSSI shares for a premium price by, inter alia, refusing to relinquish any control over NSSI, and that their actions resulted in taking a frivolous position that Stasan was not a shareholder. Id. at ¶¶ 35-36. Stasan avers that, from August 1999 until February 2001, the Logals maintained the position that Stasan was not a shareholder. Id. at ¶¶ 37-38. It also relies on the filing of Stasan I to establish conversion. Id. at ¶ 41.
Accordingly, the Logals have demonstrated beyond peradventure that Stasan's conversion claim is barred by the doctrine of res judicata. None of the arguments on which Stasan relies in opposition to the motion has merit.
* * *
The Logals' March 11, 2002 motion for summary judgment is granted as to Stasan's conversion claim, and Stasan's other causes of action against the Logals and against NSSI are dismissed without prejudice as moot. Stasan's February 4, 2002 motion for partial summary judgment is denied without prejudice as moot. By final judgment filed today, this action is dismissed in part with prejudice and in part without prejudice.