Opinion
No. 2022-C-01677 Nos. 2022-C-1674 & 2022-C-1672.
03-07-2023
Rick M. SUTTON, individually and derivatively on Behalf of Rjano Holdings, Inc. and Maison Royale, LLC, v. Jack ADAMS, Maison Royale, LLC and Rjano, Inc.
PER CURIAM.
Writs granted. In these applications, the applicant, Rick Sutton, seeks review of: 1) an April 26, 2019 judgment of Division N of the Orleans Parish Civil District Court, wherein the court sustained Jack Adams' exceptions of no right of action and res judicata and dismissed the applicant's Breach of Contract suit with prejudice; 2) a ruling of the Fourth Circuit Court of Appeal sustaining Adams' exception of res judicata and reversing a December 7, 2018 judgment of Division L rendered in favor of the applicant on his mandamus action; and, 3) the Fourth Circuit's reversal of a September 3, 2019 judgment of Division L which overruled the exception of res judicata filed by Maison Royale, LLC in opposition to the applicant's third-party demand and granted the applicant's motion for nullity. Specifically, the Fourth Circuit: sustained Maison Royale's exception of res judicata and dismissed the applicant's third-party demand against it with prejudice; sustained Adams' exception of nonjoinder of indispensable parties; vacated the district court's grant of the motion for nullity; and, dismissed the nullity motion filed by applicant in Division L.
The December 7, 2018 Judgment ordered Adams to recognize the applicant's 50% ownership in Rjano Holdings, Inc. and prohibited Adams from asserting any claim that he may act unilaterally for, or on behalf of, Rjano Holdings, Inc. without a vote of all shareholders. Adams v. Sutton, 19-0247 (La. App. 4 Cir. 10/12/22), 350 So.3d 1041.
THE RICO JUDGMENT
The objections raising the exceptions of res judicata in these matters all arise from a single judgment rendered by Division D on October 25, 2017 (the RICO judgment.) Applicant instituted the proceedings underlying the RICO judgment with the filing of a Petition for Damages, naming Jack Adams, Charles Adams (Jack Adams' father), and Polly Point Imports Corporation, as defendants. Therein, the applicant alleged causes of action for: (1) violations of the Louisiana Racketeering Act (RICO); (2) violations of the Louisiana Unfair Trade Practices Act (LUTPA); (3) fraud and misrepresentation; (4) breach of fiduciary duty; and, (5) detrimental reliance. Applicant claimed that Adams breached the settlement agreement entered into by the parties subsequent to the filing of the Breach of Contract suit filed in Division N, failed to disclose information that was pertinent to the settlement, and failed to negotiate in good faith. Applicant further alleged that Adams, his father, and Polly Point impermissibly sold jewelry at the Maison Royale, LLC store at "fire sale" prices, in violation of the settlement agreement, as well as in violation of the RICO and LUTPA statutes, through fraudulent means, and in breach of fiduciary duties owed to him. Following a hearing, the district court rendered the RICO judgment, wherein it sustained the exception of no cause of action as to all of the applicant's claims, and sustained the exception of no right of action as to the RICO, LUTPA, and breach of fiduciary duty claims, dismissing the applicant's claims against all defendants with prejudice. The RICO judgment was affirmed on appeal and writs were denied by the Louisiana Supreme Court. Sutton v. Adams, 18-196 (La. App. 4 Cir. 12/19/2018), 318 So.3d 776, writ denied, 19-346 (La. 4/22/19), 267 So.3d 1112, reconsideration denied, 19-346 (La. 9/6/19), 278 So.3d 362.
RES JUDICATA
Res judicata is designed to "promote judicial efficiency and final resolution of disputes," and generally precludes the re-litigation of claims arising out of the same facts and circumstances between the same parties of a previous suit in which there is a valid, final judgment. Avenue Plaza, LLC v. Falgoust, 96-173 (La. 7/2/96), 676 So.2d 1077. The standard of review of a peremptory exception of res judicata requires an appellate court to determine if the trial court's decision is legally correct. Myers v. Nat'l Union Fire Ins. Co. of Louisiana, 09-1517, p. 5 (La. App. 4 Cir. 5/19/10), 43 So.3d 207, 210 (citation omitted). Louisiana courts recognize that "a final judgment has the authority of res judicata only as to those issues presented in the pleading and conclusively adjudicated by the court." Id. Moreover, the doctrine of res judicata is stricti juris and, accordingly, any doubt concerning the applicability of the principle must be resolved against its application. Interdiction of Hunter, 18-685 (La. App. 4 Cir. 12/19/18), 318 So.3d 784, writ denied, 19-208 (La. 4/8/19), 267 So.3d 608.
The requirements that must be met for Louisiana courts to determine that a matter is res judicata are set forth in LSA-R.S. 13:4231, as follows:
Except as otherwise provided by law, a valid and final judgment is conclusive between the same parties, except on appeal or other direct review, to the following extent:
(1) If the judgment is in favor of the plaintiff, 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 merged in the judgment.
(2) If the 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 on those causes of action.
(3) A judgment in favor of either the plaintiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that judgment.
I. April 26, 2019 Judgment
We note that the applicant's Breach of Contract suit, filed in November of 2014, was filed two years prior to the RICO suit filed in November of 2016. Under its plain language, the res judicata statute applies to bar "a subsequent action" between the same parties as to causes of action existing at the time of the final judgment and arising out of the same transaction or occurrence that is the subject matter of the litigation. LSA-R.S. 13:4231(2). Additionally, "[a] judgment in favor of either the plaintiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that judgment." LSA-R.S. 13:4231(3). (Emphasis added). This court has previously explained that, regarding res judicata, "the chief inquiry is whether the second action asserts a cause of action which arises out of the same transaction or occurrence that was the subject matter of the first action." Burguieres v. Pollingue, 02-1385 (La. 2/25/03), 843 So.2d 1049, 1053. (Emphasis added). Insofar as the district court sustained an exception of res judicata rendered in a subsequent action to bar the claims alleged in the Breach of Contract suit (a prior suit), the court essentially applied res judicata in reverse. Based on the clear and unambiguous language of the statute, the district court erred in finding that the RICO judgment was res judicata as to the applicant's Breach of Contract suit.
Notwithstanding the statutory language, even assuming that a subsequent action could bar a prior action, we find error in the lower courts' determination that the "failed business relationship" between the parties was the relevant "transaction or occurrence" in these suits. The causes of action alleged in the applicant's Breach of Contract suit arise from claims that Adams breached an oral agreement that was reached by the parties. Specifically, the applicant alleged that, in the summer of 2011, the parties agreed to open a jewelry store and fine art gallery together, and that two entities would be formed: Rjano Holdings, Inc., to lease the property; and Maison Royale, LLC, to operate the store. Applicant further alleged that the parties agreed that Adams would handle all of the corporate and LLC paperwork, including filing the requisite formation documents. Applicant alleged that, in October of 2014, Adams breached their agreement and effectively froze him out of the business, causing him financial losses. As such, the applicant, individually and derivatively on behalf of Rjano Holdings, Inc. and Maison Royale, LLC, filed a petition for damages for breach of contract and injunctive relief, preventing Adams from acting unilaterally on behalf of Rjano Holdings, Inc. and Maison Royale, LLC. On December 1, 2014, judgment was rendered in favor of the applicant, granting the injunctive relief he sought.
In the RICO suit, the applicant reiterates the parties' factual history, stating that he and Adams agreed to form Rjano Holdings, Inc. and Maison Royale, LLC for the purpose of operating a jewelry store and fine art gallery, but that Adams essentially froze him out of the business in October of 2014, necessitating the filing of the Breach of Contract suit. Applicant further alleged that, in December of 2015, after the Breach of Contract suit was filed, the parties entered into a settlement agreement, pursuant to which the applicant was to buy out Adams' interest in Maison Royale, LLC. Applicant alleges, however, that Adams failed to honor the settlement agreement, and that he "committed numerous acts demonstrating that he never intended to settle the outstanding issues," and conspired with his father, Charles Adams, to hold a "fire sale" at Maison Royale, LLC and offer up to 70% discounts on items subject to the proposed settlement agreement. Additionally, the applicant alleged that Adams fraudulently induced him to enter into the settlement agreement without disclosing all of the material facts. Applicant alleged that defendants' "pattern of conduct" violated the RICO and LUTPA statutes, and asserted various causes of action stemming from Adams' alleged failure to honor the settlement agreement, his fraudulent and bad faith dealings, and his attempts to defraud the applicant.
Based on the respective allegations, the suits are clearly based on separate and distinct causes of action. While the Breach of Contract suit seeks damages for actions that occurred prior to November 2014, and arising from the breach of the parties' agreement vis-a-vis the formation, control, and operation of Rjano Holdings, Inc. and Maison Royale, LLC, the RICO suit seeks damages resulting from Adams' breach of the December 15, 2015 settlement agreement, and his actions in conducting a fire sale and mishandling the financial assets of the business, all of which occurred on or after December 15, 2015. Additionally, we note that the applicant attempted to supplement and amend the breach of contract suit to add the RICO suit causes of action. The district court, however, would not allow the amendment. According to the applicant, the court did not want to enlarge the pleadings. In any event, the applicant was therefore required to file a separate lawsuit in order to preserve his claims.
II. December 7, 2018 Judgment
We also find error in the Fourth Circuit's rulings sustaining the exceptions of res judicata filed by Adams and Maison Royale, LLC, and dismissing the applicant's mandamus action and third-party demand, with prejudice. We initially note that both the mandamus action and the third-party demand were filed in response and/or opposition to Adams' Abuse of Process suit. Specifically, it was Adams' allegation that he was the sole shareholder of Rjano Holdings, Inc. in the second supplemental and amending abuse of process petition that prompted the applicant to request the issuance of a Writ of Mandamus and a Writ of Quo Warranto directed to Adams, pursuant to LSA-C.C.P. arts. 3901, 3902, and 3864. The Writ of Quo Warranto ordered Adams to show by what authority he claimed to represent the interests of Rjano Holdings, Inc., and to establish who Rjano's shareholders were. The Writ of Mandamus directed Adams to either recognize the applicant's 50% ownership interest in Rjano Holdings, Inc., or show cause why he should not have to do so. A four-day evidentiary trial was held at which the parties introduced "substantial evidence," as well as extensive testimony. Following the trial, Division L rendered judgment, ordering Adams to recognize the applicant's 50% ownership of Rjano Holdings, Inc. and prohibiting him from asserting any claim that he may act unilaterally for or on Rjano's behalf without a vote of the shareholders. In his appeal of the December 7, 2018 judgment, Adams raised the exception of res judicata, alleging that the applicant's mandamus action was barred by the RICO judgment. The Fourth Circuit sustained Adams' exception, finding that Adams' Abuse of Process suit, the applicant's mandamus action, and the RICO suit all arose from the same business agreement and dispute over control and operation of the store, and therefore, the causes of action asserted in the mandamus action arose out of the same transaction or occurrence that was the subject matter of the RICO suit. Consequently, the Fourth Circuit sustained Adams' exception of res judicata, reversed the December 7, 2018 judgment making the applicant's mandamus action peremptory, and remanded the case for further proceedings on Adams' Abuse of Process claims.
LSA-C.C.P. art. 3901 states:
Quo warranto is a writ directing an individual to show by what authority he claims or holds public office, or office in a corporation or limited liability company, or directing a corporation or limited liability company to show by what authority it exercises certain powers. Its purpose is to prevent usurpation of office or of powers.
LSA-C.C.P. art. 3902 states:
When the court finds that a person is holding or claiming office without authority, the judgment shall forbid him to do so. It may declare who is entitled to the office and may direct an election when necessary. When the court finds that a corporation or limited liability company is exceeding its powers, the judgment shall prohibit it from doing so.
LSA-C.C.P. art. 3864 states:
A. A writ of mandamus may be directed to a corporation or an officer thereof to compel either of the following:
(1) The holding of an election or the performance of other duties required by the corporation's articles of incorporation or bylaws, or as prescribed by law.
(2) The recognition of the rights of the corporation's members or shareholders.
B. A writ of mandamus may be directed to a limited liability company or a member or manager thereof to compel either of the following:
(1) The holding of an election or the performance of other duties required by the limited liability company's articles of organization or operating agreement, or as prescribed by law.
(2) The recognition of the rights of the limited liability company.
It is noted that Adams testified at the hearing, however, he ultimately invoked his 5th Amendment right against self-incrimination.
As stated previously, the causes of action alleged in the RICO suit arose from Adams' breach of the December 2015 settlement agreement, and his failure to engage in good faith negotiations and fair dealing, as well as his actions in allegedly selling store inventory at "fire sale" prices, in breach of the parties' agreement and his fiduciary duties. The December 7, 2018 mandamus judgment resulted from the applicant's request for relief pursuant to LSA-C.C.P. arts. 3901, 3902, and 3864, and was prompted by the allegation of Adams that he was the sole shareholder of Rjano Holdings, Inc. In light of the responsive nature of the applicant's request for the writ of mandamus, and considering the allegations raised in the RICO suit, we find that the causes of action raised in the two did not arise from the same transaction or occurrence. The Fourth Circuit's ruling, sustaining the exception of res judicata and dismissing the December 7, 2018 judgment on the mandamus is in error.
III. September 3, 2019 Judgment
We likewise find legal error in the Fourth Circuit rulings with regard to the September 3, 2019 judgment. Specifically, we find that the Fourth Circuit erred in reversing Division L's denial of Maison Royale's exception of res judicata to the applicant's third-party demand and dismissing the demand with prejudice based on its determination that the issue of the applicant's membership in Maison Royale, LLC was "conclusively determined" in the RICO judgment. Maison Royale, LLC is not a party to the RICO suit, nor does any language whatsoever regarding Maison Royale's membership appear in the RICO judgment. We further note that, in its reasons for judgment, Division L notes that the RICO judgment was rendered and affirmed without the benefit of the four-day trial during the Writ of Quo Warranto proceedings that were held in that court. Specifically, the court noted that, "[i]n this proceeding, and having heard the extensive testimony of Mr. Adams, including the invocation of his Fifth Amendment rights, this Court determined that Mr. Adams had little to no credibility whatsoever." The court further noted that it determined the "limited documents" relied upon by the RICO court to be of little to no value, and that, in light of more extensive, developed testimony and evidence, it had found the applicant to be a member of Rjano Holdings, Inc., "a corporation that Mr. Adams himself testified was rolled directly into [the] Maison Royale partnership." In any event, the court found that the "particular issues" raised in the applicant's reconventional demand, third-party demand, and petition for declaratory judgment had not previously been adjudicated, and that the matters raised therein were distinguishable from the issues presented in the RICO case. Thus, res judicata did not attach.
In the September 3, 2019 judgment, Division L: denied Adams' exception of nonjoinder of indispensable parties, granted the applicant's motion to declare the RICO judgment an absolute nullity, and denied Maison Royale's exceptions to the applicant's third-party demand, including the exception of res judicata.
EXCEPTIONAL CIRCUMSTANCES
Louisiana law provides that an earlier judgment does not bar another action by the plaintiff when exceptional circumstances justify relief from the res judicata, effect of the judgment. LSA-R.S. 13:4232(A)(1). This provision gives the court discretion to grant relief from the judgment for exceptional circumstances. This discretion must be exercised on a case-by-case basis and such relief should be granted only in truly exceptional cases, otherwise the purpose of res judicata would be defeated. Nevertheless, this discretion is necessary to allow the court to balance the principle of res judicata with the interests of justice. The official comment to the statute refers to Rule 60(b) of the Federal Rules of Civil Procedure for guidance on what constitutes "exceptional circumstances." Rule 60(b) gives courts wide-ranging equitable discretion to relieve a party from a final judgment, "especially if no intervening rights have attached in reliance upon the judgment and no actual injustice will ensue." 11 Charles Alan Wright, Arthur R. Miller, and Mary Kane, Federal Practice and Procedure § 2857, 256 (2nd ed. 1995). In particular, Rule 60(b)(6) is a "grand reservoir of equitable power to do justice in a particular case when relief is not warranted" on other grounds specified in the rule, and this clause "gives the courts ample power to vacate judgments whenever such action is appropriate to accomplish justice." Hesling v. CSX Transp., Inc., 396 F.3d 632, 643 (5th Cir. 2005); Chauvin v. State Farm Mut. Auto. Ins. Co., 2007 WL 2903321, at *6 (E.D. La. 2007). It is designed to protect those drawn into error by an awkward factual or legal scenario, not those who can allude to no circumstance to justify their inaction below. Spear v. Prudential Property and Cas. Ins. Co., 98-1663 (La. App. 4 Cir. 1/13/99), 727 So.2d 640, 642-43; Centanni v. Ford Motor Co., 93-1133 (La. App. 3 Cir. 5/4/94), 636 So.2d 1153, writ denied, 94-1949 (La. 10/28/94), 644 So.2d 656.
The evidence admitted at the trial of the mandamus in Division L indicates a risk of a miscarriage of justice in this case. Adams admitted under oath to falsifying alleged corporate documents which he attempted to introduce into evidence as proof that he was the sole shareholder of Rjano Holdings, Inc.
The evidence introduced at that trial established that the applicant: 1) signed a lease on the store premises as a duly authorized representative of Rjano Holdings, Inc., and as a personal guarantor, assuming personal liability in excess of $2 million; 2) took no salary or other wages for approximately 15 months; 3) put over $57,000 of his own money into the business in cash loans and equity investments; and, 4) worked exclusively for the business, including making sales, managing employees, traveling to view and purchasing art for sale in the store.
At the trial of the mandamus, Adams attempted to introduce a copy of a purported stock certificate as evidence that he was the sole shareholder of Rjano Holdings, Inc. However, during his testimony, he admitted under oath that he had altered the purported certificate by both signing and "back dating" the document well after litigation between the parties had commenced.
CONCLUSION
For the reasons expressed herein, we vacate the April 26, 2019 judgment rendered by Division N of the Orleans Parish Civil District Court, the Fourth Circuit's ruling sustaining the exception of res judicata as to the applicant's mandamus action, and the Fourth Circuit's ruling sustaining the exception of res judicata and dismissing with prejudice the applicant's third-party demand against Maison Royale, LLC, with prejudice. These matters are remanded to Division N for a contradictory hearing pursuant to LSA-C.C.P. art. 1561, LSA-C.C.P. art. 253.2, and CDC App. 9.3 of the Louisiana District Court Rules, to determine whether consolidation would be appropriate and/or in the interest of justice. VACATED AND REMANDED WITH INSTRUCTIONS.
LSA-C.C.P. art. 1561(A) states:
A. When two or more separate actions are pending in the same court, the section or division of the court in which the first filed action is pending may order consolidation of the actions for trial or other limited purposes after a contradictory hearing, upon a finding that common issues of fact and law predominate, and, in the event a trial date has been set in a subsequently filed action, upon a finding that consolidation is in the interest of justice. The contradictory hearing may be waived upon the certification by the mover that all parties in all cases to be consolidated consent to the consolidation.
The interdivisional transfer of cases is governed by LSA-C.C.P. art. 253.2, which states as follows:
After a case has been assigned to a particular section or division of the court, it may not be transferred from one section or division to another section or division within the same court, unless agreed to by all parties, or unless it is being transferred to effect a consolidation pursuant to Article 1561. However, the supreme court, by rule, may establish uniform procedures for reassigning cases under circumstances where an expeditious disposition of cases may be effectuated.
CDC App. 9.3 states, in pertinent part, as follows:
ALLOTMENT OF CASES
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4. To achieve continuity of case management, and to avoid the appearance of forum shopping, it is the policy of the court that subsequent but related cases should be transferred to the division to which the original case was allotted, whether or not such earlier case is still pending. It shall be the duty of any attorney in such cases to call to the court's attention the existence of such earlier case.
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TRANSFER CONSOLIDATION
1. To facilitate the fair and expeditious resolution of cases, it is the policy of the court to transfer to the lower numbered suit and consolidate for trial those cases in which such consolidation is appropriate. The transfer and consolidation shall be by order of the judge to whom the case is being transferred, after contradictory hearing with all parties in each case, or with their written approval. It shall be the duty of any attorney in any case which ought to be consolidated to so move or call to the court's attention the pendency of related cases that should be considered for consolidation.