Gargallo
v.
Merrill, Lynch, Pierce, Fenner & Smith

918 F.2d 658 (6th Cir. 1990)

What's Going On?

Plaintiff seeks review of a district court's dismissal, on grounds of claim preclusion, of his suit against Defendants for violations of federal securities laws.

Who's Who?

Plaintiff      :

Miguel Gargallo – account holder with Defendant Merrill Lynch.

Defendants :

Merrill, Lynch, Pierce, Fenner & Smith – broker; and
Larry Tyree – account executive of Merrill, Lynch, Pierce, Fenner & Smith.

Facts:

Plaintiff Miguel Gargallo opened a brokerage account with Defendant Merrill Lynch, a broker, in 1976. By 1980, Plaintiff owed $17,000 to Defendant after incurring losses. Plaintiff did not repay his debt, and Defendant filed suit for collection in an Ohio state court. Plaintiff filed an answer and counterclaim in response, alleging that Defendant had caused his losses through negligence, misrepresentation, and churning in violation of federal securities laws. The state court dismissed Plaintiff's counterclaim with prejudice for refusal to reply with Defendant's discovery requests and court orders. Plaintiff then filed a complaint in federal court, alleging that Defendant Merrill Lynch and its account executive, Defendant Larry Tyree, had violated federal securities laws. The district court dismissed Plaintiff's suit on grounds of res judicata, finding that the issues, facts, and evidence to sustain the action were identical to the claims asserted in Plaintiff's previous counterclaim. Plaintiff appealed.

Issue:

Must a federal court apply state claim preclusion law in deciding whether a prior state court judgment upon subject matter over which only a federal court has jurisdiction is a bar to a subsequent federal court claim upon the identical cause of action?

Decision:

Yes. Plaintiff asserted the same federal securities law violations against Defendant Merrill Lynch as he asserted in the state court counterclaim. In Ohio, as in federal court, the doctrine of claim preclusion provides that an existing final judgment upon the merits, without fraud or collusion, by a court of competent jurisdiction, is conclusive of rights, questions, and facts in issue, as to the parties and their privies, in all other actions in the same or any other court of concurrent jurisdiction. Under Ohio law, the Ohio court's dismissal of Plaintiff's counterclaim was a final judgment rendered on the merits, and the federal claim or cause of action giving rise to the present appeal is the same claim or cause of action that was asserted in the counterclaim dismissed in the state court. Therefore, Ohio claim preclusion law would bar the claim asserted in Plaintiff's district court complaint had it been filed in an Ohio court. Because Plaintiff brought his claim in a federal court, not an Ohio court, it must be determined whether a federal district court may give claim preclusive effect to an Ohio judgment regarding federal securities laws that are within the exclusive jurisdiction of the federal courts. The full faith and credit statute, 28 U.S.C. § 1738, requires a federal court to give a state court judgment the same preclusive effect that it would have in a state court. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985) requires a federal court to determine whether to give claim preclusive effect to a state court judgment upon a cause of action over which the state court had no subject matter jurisdiction by determining whether the state court would give preclusive effect to such a judgment. Under Ohio law, a final judgment by an Ohio court, upon a cause of action over which the adjudicating court had no subject matter jurisdiction, does not have claim preclusive effect in subsequent proceedings. Therefore, the Ohio court's dismissal of Plaintiff's federal securities law claims against Defendant Merrill Lynch may not be given claim preclusive effect in a subsequent federal court action asserting those same claims. Reversed and remanded.

Basic Rule:

A federal court may not give claim preclusive effect to a prior final judgment by a state court upon a cause of action over which the state court had no subject matter jurisdiction.

Terms:

Churning :

The excessive trading of securities for the purpose of generating commissions for the stockbroker.

Home  |  Briefs  |  Glossary  |  Contact Us