Sentinel Trust Co. v. Universal Bonding Insurance , 316 F.3d 213 ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
1-8-2003
Sentinel Trust Co v. Unvrsl Bonding Ins C
Precedential or Non-Precedential: Precedential
Docket 02-1125
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PRECEDENTIAL
Filed January 8, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1125
SENTINEL TRUST COMPANY,
Appellant
v.
UNIVERSAL BONDING INSURANCE COMPANY; UNITED
STATES FIRE INSURANCE COMPANY; WESTCHESTER
FIRE INSURANCE COMPANY; and RICHARD
QUACKENBUSH,
Appellees
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 01-cv-518 )
District Judge: Honorable Nicholas H. Politan
Argued November 1, 2002
Before: NYGAARD and WEIS, Circuit Judges, and
IRENAS,* District Judge.
Filed: January 8, 2003
Keith J. Miller, Esquire (ARGUED)
Robinson & Livelli
Two Penn Plaza East
Newark, NJ 07105
_________________________________________________________________
* The Honorable Joseph E. Irenas, United States District Judge for the
District of New Jersey, sitting by designation.
Ames Davis, Esquire
Stanley Graham, Esquire
Waller Lansden Dortch & Davis
511 Union Street, Suite 2100
Nashville, TN 37219
Attorneys for Appellant
Sentinel Trust Company
Steven H. Rittmaster, Esquire
(ARGUED)
Mark S. Gamell, Esquire
Torre, Lentz, Gamell, Gary &
Rittmaster, LLP
Mark S. Kundla, Esquire
Hardin, Kundla, McKeon, Poletto
& Polifroni
673 Morris Avenue
Springfield, NJ 07081
Attorneys for Appellees
United States Fire Insurance
Company and Westchester Fire
Insurance Company
Andrew S. Kent, Esquire (ARGUED)
Gage Andretta, Esquire
Wolff & Samson, P.A.
5 Becker Farm Road
Roseland, NJ 07068
Attorneys for Appellee
Universal Bonding Insurance
Company
OPINION OF THE COURT
WEIS, Circuit Judge:
In this diversity case, an indenture trustee was denied
recovery from sureties on performance bonds. In part, the
District Court’s ruling under Rule 12(b)(6) rested on
findings of fact unfavorable to the trustee in a related case.
2
We apply issue preclusion despite the fact that the earlier
judgment had been vacated as a term of settlement of that
case. Concluding that the District Court did not err in its
order of dismissal, we will affirm.
The plaintiff, Sentinel Trust Company, having its
principal place of business in Nashville, Tennessee, was the
indenture trustee for a series of corporate notes of
Transportation Leasing Corporation and Voyageur Lines,
Inc. issued to various investors. These notes were sold to
the public by a group including David Namer of Memphis,
with the representation that payments were guaranteed by
surety bonds.
Universal Bonding Insurance Company, an agency with
its principal place of business in New Jersey, and its vice-
president Richard Quackenbush, procured bonds from two
surety companies running in favor of Sentinel as trustee.
When defaults on the notes occurred, Universal and the
surety companies refused to honor claims against the
bonds. After it became known that Quackenbush had
participated with Namer in fraudulently issuing the bonds,
Universal agreed to indemnify the surety companies against
any loss.
Sentinel, as trustee and on behalf of the noteholders,
began litigation in 1997 against Universal and the sureties
in the United States District Court in New Jersey seeking to
compel payment of the bonds. While those actions were
pending, Sentinel was removed as trustee by disgruntled
noteholders and was replaced by Nevada State Bank, which
succeeded to all rights and obligations under the indenture.
In 1999, Nevada settled the suits in the New Jersey District
Court for $3,585,000, an amount less than the full amount
of the bonds.
On behalf of the noteholders, Nevada then joined in a
pending action brought by other claimants in the Chancery
Court for Davidson County, Tennessee, against Sentinel for
derelictions it had committed as trustee. The complaint
asserted claims for conversion, breach of fiduciary duty,
breach of contract, and negligent management of the
financing arrangement. In 1999, Sentinel joined Universal,
the surety companies, and Quackenbush as third-party
defendants in that litigation.
3
The Chancery Court filed extensive findings of fact and
conclusions of law, and entered summary judgment for
Nevada against Sentinel for an amount in excess of $2
million. Sentinel then dismissed without prejudice its
complaint against third-party defendants, Universal and the
surety companies.
After the judgment and dismissal, Nevada and Sentinel
reached a settlement, one of whose terms was that the
Chancery Court’s judgment for damages would be vacated.
On February 21, 2001, the Chancery Court signed a
consent order vacating its judgment. Universal and the
surety companies were not parties to that order.
Before the vacatur was actually docketed, Sentinel filed a
complaint against Universal, the surety companies, and
Quackenbush on February 1, 2001 in the District Court for
the District of New Jersey. The complaint recited allegations
essentially the same as those contained in the third-party
complaint Sentinel had previously filed in the Tennessee
Chancery Court. Sentinel sought damages in the form of
litigation expenses incurred in the Chancery suit,
reimbursement of the amounts it paid in the settlement, as
well as damages for breach of contract and statutory
causes of action under Tennessee law.
Relying on Tennessee law, the District Court dismissed
the complaint under Fed. R. Civil Procedure 12(b)(6). The
Court denied the contract claims because Sentinel was no
longer a trustee, and the obligations on the surety bonds
were not owed to it personally. Sentinel was viewed as a
mere "incidental beneficiary" and, as such, it"had no
standing to sue for any alleged breach or inducement to
breach obligations on the bonds."
The indemnification count was rejected based on the
findings of the Tennessee Chancery Court that Sentinel was
"liable for its negligent acts." Finally, the Court noted that
Nevada, as successor trustee, had released Universal and
the surety companies from all claims of the noteholders.
Although Sentinel asserted that the consideration for the
release was inadequate, the Court ruled that the amount
paid was sufficient.
4
Sentinel has appealed, asserting that the District Court
misconstrued its claims for breach of contract and
inducement of breach, as well as improperly relying on the
findings of fact underlying the vacated judgment in
dismissing the indemnity claim. Rejection of the statutory
claims arising under Tennessee law is also alleged to be
erroneous.
We have jurisdiction under 28 U.S.C. S 1291. Our review
of the District Court’s rulings is plenary. Maio v. Aetna Ins.
Co., 221 F.3d 472, 481 (3d Cir. 2000).
Under Federal Rule of Civil Procedure 12(b)(6), the court
must accept the facts set out in the complaint. However, a
defendant may supplement the complaint by adding
exhibits such as public records and other indisputably
authentic documents underlying the plaintiff ’s claims.
Pittsburgh v. West Penn Power, 147 F.3d 256, 259 (3d Cir.
1998); ALA v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994);
Pension Benefit Guar. Co. v. White Consol. Indus. , 998 F.2d
1192, 1196 (3d Cir. 1993). Our review, as well as the
District Court’s ruling, includes consideration of such
documents.
I. Breach of Contract
Sentinel’s claim for breach of contract against Universal
and their sureties is based upon their refusal to honor their
obligations to guarantee payment of the TLC and Voyageur
notes. Sentinel originally made these assertions in the
District Court as trustee on behalf of the noteholders. When
Nevada succeeded Sentinel as trustee, and settled the
noteholders’ claims against Universal and the sureties, it
reserved the right to proceed against Sentinel, and did so in
the Tennessee Chancery Court.
Ultimately, Sentinel paid a substantial sum to Nevada as
incumbent trustee in settlement of the Tennessee action. It
is that settlement amount and the expenses associated with
it that Sentinel seeks to recover here against defendants
Universal and the sureties.
Sentinel argues that if Universal and the sureties had
paid the full amount of the bonds, either upon demand or
5
in settlement of the original suit by Nevada, then the
noteholders would have had no damages to assert in the
Chancery suit. Consequently, Sentinel would, in effect,
have been immunized. This scenario is implicitly based on
the proposition that the sureties could not have invoked
Sentinel’s derelictions as a defense on the bonds. Such a
contention is dubious at best.
Basic tenets of suretyship may protect a surety from
responsibility when the obligee bears fault for the loss. An
obligee must act with diligence in transactions with the
principal, and must have appropriately performed its
contractual obligations in order for the principal and surety
to be liable. See M. Michael Egan & Marla Eastwood,
"Discharge of the Performance Bond Surety" in The Law of
Suretyship 119 (Edward G. Gallagher ed., 2d ed. 2002).
A substantial difference exists between contracts of
indemnity and those of suretyship. An indemnity policy
undertakes to protect a promisee against loss because of
his own liability to a third person. The undertaking of a
surety, on the other hand, is intended to protect the
promisee against loss through failure of a third person to
carry out his obligation to the promisee.
In certain circumstances, a surety may be released from
its obligations when derelictions by the obligee brought
about the loss. Under Tennessee law, a compensated surety
is entitled to be relieved to the extent of the loss actually
caused by breach of an obligee’s duty. Central Towers
Apartments, Inc. v. Manton, 453 S.W.2d 789, 796-97 (Tenn.
Ct. App. 1969).
Here, the District Court pointed out that the bonds were
not issued to Sentinel personally, but only in its capacity as
trustee. See Rest. (2d) of Trusts, S 196, comment g (1959)
(stating that "all powers of a trustee shall be attached to
the office and shall not be personal") (citing Uniform Trusts
Act, S 10). When Nevada replaced Sentinel as trustee, the
surety’s obligations were transferred to Nevada as the
representative of the noteholders.
The Court further observed that Sentinel, as trustee and
thus a mere agent, was not entitled to a portion of the bond
proceeds. Rather, the obligations were owed to the office of
6
trustee, making Sentinel only an incidental beneficiary. The
fact that Sentinel was entitled to compensation for its work
as trustee in administering the financial arrangements did
not confer standing to sue on its own behalf for breach or
alleged inducement to breach the bond agreement. Under
Tennessee law, only intended beneficiaries of a contract,
and not incidental beneficiaries, may recover for a breach.
In Abraham v. Knoxville Family Television, Inc. , 757
S.W.2d 8 (Tenn Ct. App. 1988), the Court concluded that
plaintiffs are considered to be incidental beneficiaries if
they cannot show that the contract was intended for their
direct benefit. The Tennessee Supreme Court held in
Willard v. Claborn, 419 S.W.2d 168 (Tenn. 1967), that an
agent could not maintain a breach of contract suit without
a special interest or property interest in the subject matter
of the contract. Right to a commission does not amount to
such a property interest, and as a mere incidental
beneficiary to a contract, an agent could not recover upon
a breach of contract, nor on the tort of inducing a breach.
We are persuaded that these cases set out the Tennessee
law applicable to this case, and therefore, the District Court
did not err in denying Sentinel’s claims of a breach of
contract and inducement to breach a contract.
II. Indemnity
Sentinel also asserts that under either implied
contractual or equitable theories of indemnification, it is
entitled to recover the sums it expended in settlement of
the Chancery suit. As Sentinel sees it, Universal and the
surety companies conspired with Quackenbush to deprive
the noteholders of protection from nonpayment and should
be liable for the full amount of the loss.
Upon examination of the record, however, it seems that
Quackenbush did not defraud the noteholders, but rather
the surety companies in causing them to write the bonds
without the customary collateral. The liability for this fraud
appears to have been resolved when Universal agreed to
indemnify the surety companies, and in accordance with
that arrangement paid a substantial sum on the
noteholders claims. Thus, Quackenbush’s fraud became
7
irrelevant to the noteholders’ interest once Universal took
control of the litigation against the sureties and assumed
their liabilities.
Tennessee law on indemnity is summarized in the
frequently cited Winter v. Smith, 914 S.W.2d 527 (Tenn. Ct.
App. 1995). The concept relies on two principles-- that all
should be responsible for their own derelictions and,
therefore, wrongdoers should be liable to persons who are
required to pay damages that the wrongdoers should have
paid. "Indemnification requires the complete shifting of
liability for loss from one person to another." Id. at 541.
Implied indemnity obligations may be equitable or
contractual and are imposed by law. Indemnity will be
enforced when the obligation is a necessary element in the
parties’ relationship or where fairness "demands that the
burden of paying for the loss be shifted to the party whose
fault or ‘responsibility is qualitatively different from the
other parties.’ " Velsicol Chem. Corp. v. Rowe, 543 S.W.2d
337, 339 (Tenn. 1976) (qualitatively, e.g., as in the active
and passive negligence sense).
In Southern Coal & Coke Co. v. Beech Grove Mining Co.,
381 S.W.2d 299, 302 (Tenn. Ct. App. 1964), the Court held
that one who has discharged the duty owed by another is
entitled to indemnity "unless the payor is barred by the
wrongful nature of his conduct." (citing Rest. of Restitution,
S 76). Further discussion of indemnity under Tennessee law
may be found in Owens v. Truckstops of Am., 915 S.W.2d
420, 434 (Tenn. 1996); Houseboating Corp. Of Am. v.
Marshall, 553 S.W.2d 588 (Tenn. 1977).
It appears that, under general principles of indemnity
followed in Tennessee law, a party may not shift the full
burden through indemnity, either contractual or equitable
when it is responsible for its own negligence or wrongful
conduct in connection with the claimed loss.
In the case at hand, the District Court observed that
"there was a finding by a Tennessee state court that
Sentinel was liable for negligent acts . . . . Although that
finding was apparently later vacated, Sentinel voluntarily
entered into a settlement agreement, after a finding of
liability against it was made . . . ." Sentinel insists that the
8
District Court’s reliance on the vacated judgment
constitutes reversible error.
The chronology of the Tennessee proceeding is important
in understanding the nature of the issue. As noted earlier,
Nevada Bank, on behalf of the noteholders, joined in a suit
previously filed by other entities against Sentinel in the
Chancery Court of Davidson County, Tennessee.
The Chancery Court filed extensive findings of fact and
conclusions of law on August 16, 2000, and, on August 24,
2000, entered judgment in favor of Nevada Bank and
against Sentinel in an amount in excess of $2 million. No
findings were made as to Universal and the sureties as
third-party defendants. Some months later, on December 6,
2000, Sentinel took a voluntary non-suit, without
prejudice, dismissing the third-party claims against
Universal and the sureties. They did not consent to nor
contest the motion at that time.
Nevada Bank and Sentinel then settled and agreed to a
vacatur of the judgment. In accordance with a stipulation,
the Chancery Court on February 21, 2001 filed an order
stating:
"(1) the judgment rendered against Sentinel pursuant to
this court’s order dated August 24, 2000 is hereby vacated;
(2) plaintiffs’ complaint, including all amendments
thereto, is hereby dismissed with prejudice."
The vacation of the Chancery Court judgment is an
accomplished fact that is beyond our review at this point.
Nevertheless, it does have some bearing on the question
that remains: whether preclusive effect is to be given to the
findings of fact underlying that judgment.
In resolving that issue it is helpful to review the use of a
stipulation to vacate a judgment as a condition of
settlement between the parties. This practice has been a
controversial subject for some years. The arguments pro
and con have centered upon whether the practice helps or
hinders settlements and whether the public interest and
rights of third-parties may be affected. Not surprisingly, the
9
debate has been the focus of extensive academic
commentary.1
In appraising the practice, we initially look to Tennessee
law to the extent that it furnishes guidance. Migra v.
Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984);
In re Brown, 951 F.2d 564, 568-69 (3d Cir. 1991). However,
none of the parties to this appeal nor our independent
research has directed us to any Tennessee appellate cases
that discuss the validity of vacatur on stipulation of the
parties.
Having failed to find any guiding state law, we turn to
federal appellate decisions for general principles that may
serve to aid our "prediction" on how the highest court in
Tennessee would resolve the issue. In view of the
continuing controversy over the matter, it is not unexpected
to find that the federal courts have not been in agreement.
The Court of Appeals for the Seventh Circuit has been
firmly opposed to approving settlements that include as a
condition that the district court judgment be vacated. In re
Mem’l Hosp., 862 F.2d 1299 (7th Cir. 1988). The Second
Circuit, once routinely permitted expungements as part of
a settlement, Nestles Co. v. Chester’s Mkt., 756 F.2d 280(2d Cir. 1985), but later changed course in concluding that
mere settlement is not sufficient to justify recision of a
judgment. Bristol Tech. v. Microsoft, 250 F.3d 152 (2d Cir.
2001).
_________________________________________________________________
1. See, e.g., Jill E. Fisch, Reinventing History; the Propriety of Eradicating
Prior Decisional Law Through Settlement and Vacatur , 76 Cornell L. Rev.
589 (1991); Judith Resnik, Whose Judgment? Vacating Judgments,
Preferences for Settlement and the Role of Adjudication at the Close of the
Twentieth Century, 41 UCLA L. Rev. 1471 (1994). Note, The Benefits of
Applying Issue Preclusion to Interlocutory Judgments in Cases that Settle,
76 NYU L. Rev. 874 (2002); Note, Settlement Pending Appeal: An
Argument for Vacatur, 58 Fordham L. Rev. 233 (1989); Note, Avoiding
Issue Preclusion by Settlement Conditioned Upon the Vacatur of Entered
Judgments, 96 Yale L. J. 860 (1987). Note, Erasing the Law, The
Implications of Settlements Conditioned upon Vacation of Reversal of
Judgments, 50 Wash. & Lee Law Rev. 1229 (1993). Note, Unsettling
Settlements; Should Stipulated Reversals be Allowed to Trump Judgments’
Collateral Estoppel Effects Under Neary, 85 Cal. L Rev. 479 (1997).
10
In Nat’l Union Fire Insur. Co. v. Seafines Corp. , 891 F.2d
762, 765 (9th Cir. 1989) (citing Ringsby Truck Lines, Inc. v.
Western Conference of Teamsters, 686 F.2d 720, 722 (9th
Cir. 1982), the Court of Appeals for the Ninth Circuit held
that the decision to grant vacatur requires the district court
to weigh the balance between the "competing values of
finality of judgments and right to relitigation of unreviewed
disputes." We have voiced our opposition to settlements
conditioned on nullification of judgments for money
damages, see Clarendon v. Nu-West Indus., 936 F.2d 127(3d Cir. 1991), but have permitted the practice when the
trial court’s injunctive order imposed a legal bar to
settlement. Orocare D.P.O., Inc. v. Merin, 972 F.2d 519, 522
(3d Cir. 1992).
Much of the controversy was resolved by the Supreme
Court in U.S. Bankcorp Mortg. Co. v. Bonner Mall P’ship,
513 U.S. 18 (1994). In that case, the Court phrased the
issue before it as "whether appellate courts in the federal
system should vacate civil judgments of subordinate courts
in cases that are settled after appeal is filed or certiorari
sought." Bonner Mall, 513 U.S. at 19. The Court’s answer,
in a unanimous opinion, might fairly be stated as"generally
no."
The Court discussed the "equitable entitlement to the
extraordinary remedy of vacatur," and acknowledged that a
party’s "voluntary forfeiture of review constitutes a failure of
equity." Id. at 26. The Court also recognized the public
interest in judicial precedents that are "presumptively
correct and valuable to the legal community as a whole.
They are not merely the property of private litigants and
should stand unless a court concludes that the public
interest would be served by a vacatur." Id .
The authors of a leading treatise had taken the position
that the parties should be free to settle pending appeal on
terms that require vacation of a district court judgment.
However, "this view has been emphatically rejected by the
Supreme Court" in Bonner Mall. Wright, Miller & Cooper,
13 Fed. Prac. & Proc., S 3533.10 (2001).
Bonner Mall, by its terms, is limited to the federal court
system and, therefore, is not directly applicable to state
11
courts. Nevertheless, a unanimous opinion by the Supreme
Court of the United States does have force and furnishes
philosophical guidance for resolution of similar situations
in the state courts. See, e.g., Comm’r of Motor Vehicles v.
Demilo & Co., 659 A.2d 148, 157-58 (Conn. 1995);
Paramount Comm. v. Gibralter Cas. Co., 623 N.Y.S.2d 850(App. Div. 1995).
Because the Chancery Court’s vacatur is a fait accompli
at this stage, the more immediate question for us is
whether the Supreme Court of Tennessee would apply
preclusive effect to the findings underlying the vacated
judgment. We have found no Tennessee law on point and,
therefore, we must look to general principles of issue
preclusion to aid in our prediction.
In Beaty v. McGraw, 15 S.W.3d 819, 824 (Tenn. Ct. App.
1998), the Court explained that issue preclusion is
designed "to conserve judicial resources," and"relieve
litigants from the cost and vexation of multiple law suits."
The doctrine bars the same parties or their privies from
relitigating in the second suit issues that were actually
raised and determined in an earlier case. Id.Under Tennessee law, the party invoking issue preclusion
must demonstrate that: (1) the precluding issue is identical
to that decided in the earlier suit; (2) that the issue was
actually litigated and decided on the merits; (3) that the
judgment in the earlier suit has become final; (4) that the
party against whom preclusion is asserted was a party or in
privity in the earlier suit; and (5) that the party had a full
and fair opportunity to litigate the issue. Id . at 824-25.
Issue preclusion, when used by the defendant in the
second suit, does not require party mutuality, Trinity Indus.
v. McKinnon Bridge Co., 77 S.W.3d 159, 185 (Tenn. Ct. App.
2001), so long as the issue sought to be precluded is
identical in both cases. The concept of privity in this
context pertains to the subject matter of the litigation, not
to the relationship between the parties themselves. Privity
connotes an identity of interest and depends on the facts of
each case. Chilar v. Crawford, 39 S.W.3d 172, 181 (Tenn.
Ct. App. 2000).
12
Here, the matters sought to be precluded from further
litigation are Sentinel’s negligent conduct and failure to
properly satisfy its fiduciary obligations. There is no doubt
that these issues were actually litigated and decided on the
merits, as memorialized by the Chancery Court’s findings of
fact and conclusions of law. Sentinel was a party to that
suit and had a full and fair opportunity to defend itself.
That leaves for discussion only the question of whether
the judgment of the Chancery Court was "final," or
rephrased in the circumstances here, whether the vacatur
should be narrowly construed so as to grant validity to the
findings of fact. The concepts of equity and fair dealing
enter into this determination.
As the Court acknowledged in C.O. Christian & Sons, Inc.
v. Nashville P.S. Hotel, 765 S.W.2d 754, 756 (Tenn. Ct. App.
1989), "[t]he cases do not provide much guidance, however
on the issue of what constitutes a final judgment for
purposes of collateral estoppel . . . the principles governing
the meaning of final judgment for purposes of appeal may
differ from those relevant for purposes of collateral
estoppel." In Richardson v. Tennessee Bd. of Dentistry, 913
S.W.2d 446 (Tenn. 1995), the judgment was considered
final when the chancellor’s memorandum and order
conclusively determined all issues and left nothing for
further adjudication. Although helpful, these broad
propositions do not answer the question of whether the
findings of fact may be invoked when the judgment is
vacated by consent.
Our review of the opinions of the Tennessee appellate
courts reveals many instances where the Restatement of
Judgments (Second) is cited with approval. We have not
encountered any Tennessee case that refers to section 13 of
that Restatement, but in light of C.O. Christian & Sons, we
think that in an appropriate setting, that section would be
cited as reflecting Tennessee law.
Section 13 of the Restatement of Judgment (Second)
provides that ". . . for purposes of issue preclusion . . . ,
‘final judgment’ includes any prior adjudication of an issue
in another action that is determined to be sufficiently firm
to be given preclusive effect." Any other interpretation could
13
lead to "needless duplication of effort and expense in the
second action to decide the same issue." See comment g.
See also Lummus v. Commw. Oil & Refining Co., 297 F.2d
80, 87 (2d Cir. 1961); In re Brown, 951 F.2d at 596.
In Employees Own Fed. Credit Union v. City of Defiance,
752 F.2d 243 (6th Cir. 1985), a state trial court entered
findings of fact and conclusions of law adverse to the
plaintiff Credit Union, but allowed it to file an amended
complaint within 20 days. Before the expiration of that
period, the Credit Union voluntarily dismissed the actions
without prejudice and a few days later filed the same claim
in federal court. The Court of Appeals held that the state
court decision embodying findings of fact and conclusions
of law was sufficiently firm to be accorded preclusive effect.
Similarly, in Birgel v. Bd. of Comm’rs of Butler County,
125 F.3d 948 (6th Cir. 1997), the Court said that ordinarily
collateral estoppel requires a final judgment. However, the
plaintiff ’s voluntary dismissal of a claim after it had been
remanded by the state appellate court for further
proceedings in the state trial court barred relitigation of the
same claim in federal court. The order of the state court
had been sufficiently firm, even in the absence of a formal
judgment, to allow preclusion. "We will not permit a
plaintiff to abandon his failing state court suit and file a
virtually identical suit in federal court in hopes of achieving
a more favorable result." Id. at 952.
Other courts have also adopted this position on finality in
the collateral estoppel context. In Chemetron Corp. v.
Business Funds, Inc., 682 F.2d 1149 (5th Cir. 1983),
vacated on other grounds, 460 U.S. 1007 (1983), the Court
applied issue preclusion even though the trial court had
vacated a judgment as a condition of settlement. 2 See also
Bates v. Union Oil Co., 944 F.2d 647 (9th Cir. 1982); John
Morrell v. Local Union, 913 F.2d 544 (8th Cir. 1990);
O’Reilly v. Malon, 747 F.2d 820 (1st Cir. 1984).
_________________________________________________________________
2. Chemetron has had a somewhat checkered career in the Fifth Circuit.
It was criticized in Avondale Shipyards v. Insured Lloyd’s, 786 F.2d 1265(5th Cir. 1986), and J.R. Clearwater Ashland Chem. v. Ashland Chem.,
93 F.3d 176 (5th Cir. 1996). However, it was cited in Cycles Ltd. v.
Navisteer Fin. Corp., 37 F.3d 1088 (5th Cir. 1994).
14
Taking guidance from these general principles, we first
observe that the Chancery Court’s order did not purport to
expunge the findings of fact and conclusions of law.
Contrast the silence of the Tennessee Court’s order on that
point with that in Harris Trust & Sav. Bank v. John
Hancock Mut. Life Ins., 970 F.2d 1138 (2d Cir. 1992), where
preclusion was denied. In that case, the first court’s order
directed that "the order, together with the findings and
conclusions embodied therein, is . . . vacated, and shall be
of no force or effect against the defendant by . . . third
parties for collateral estoppel or other preclusive purposes."3
Id. at 1146. The Chancery order in this case contains no
such language, but merely states that the "judgment" is
vacated.
Next, we note that the judgment and findings of fact
against Sentinel were entered by the Chancery Court
during the time when Universal was a third-party
defendant. This being so, Sentinel could and should have
litigated its claims in the Chancery Court. Consequently,
whatever force the arguments against non-mutual estoppel
might have is not implicated here. Although not specified as
applicable to the third-party proceedings, the findings of
fact were of obvious benefit to Universal in its defense of
Sentinel’s complaint against it.
No doubt because of the disadvantageous position in
which the findings had placed it, Sentinel unilaterally took
a voluntary non-suit without prejudice against Universal,
an action to which it did not consent. Tennessee Rules of
Civil Procedure 41.01 provides that a plaintiff may take a
voluntary non-suit "at any time before the trial of a cause
. . . or by oral notice ‘in open court during the trial of a
cause; or in jury trials at any time before the jury retires to
consider its verdict and prior to the ruling of the court
sustaining a motion for a directed verdict.’ " Rule 41.03
extends that rule to cover the "dismissal of . . . third-party
claims."
Our reading of the Tennessee procedural rules leads us
to question whether Sentinel had the right to dismiss
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3. We need not decide whether such a stipulation could bind absent
parties.
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without prejudice when the Chancellor had already entered
findings of fact and judgment against it. We may not review
the validity of the non-suit because at this point it is not
subject to reversal by federal courts. However, the dismissal
of the third-party complaint at that stage and subsequent
filing of essentially the same document in the New Jersey
District Court is a flagrant instance of forum shopping.
Based on the proceedings to that point, Sentinel
apparently believed its chances of success in the third party
action against Universal in the Chancery Court were dim
and decided to try another forum. This is an example of the
unnecessary duplication of litigation that the doctrine of
issue preclusion is designed to prevent. The circumstances
are quite similar to those in Employees Own Fed. Credit
Union v. City of Defiance, 752 F.2d 243 (6th Cir. 1985),
where the Court applied res judicata to findings of fact that
were entered before the plaintiff took a voluntary dismissal.
According to the Court, "we see no reason to allow a party
to get an adverse judgment in state court and turn around
and sue on the same claim in federal court. One bite at the
apple is enough." Id. at 245.
Moreover, as noted above, concepts of equity and fair
dealing come into play. Sentinel’s tactics were carefully
timed. When it presented the motion to vacate the
judgment, Universal was no longer a party to the Chancery
suit, and the vacatur was thus unopposed. It is also
interesting that Sentinel filed the action in the federal court
in New Jersey before the vacation order was entered by the
Chancery Court. At the time the litigation was commenced
in New Jersey, therefore, a final judgment had been entered
against Sentinel and findings of fact underlying that
judgment were in full force and effect.
We are persuaded that in view of all the circumstances
here, if the case were submitted to the Supreme Court of
Tennessee, it would apply issue preclusion.
The Chancery Court found that Sentinel breached its
obligations to the noteholders in a number of respects,
including failure to ensure that the security interests in the
collateral were perfected, allowing collateral to be
improperly sold and transferred out of trust, failing to
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collect loan payments from the notemakers, failing to make
timely demands on the sureties, and making improper
investment of funds entrusted to it. These findings of fact
established violations of Sentinel’s obligations as trustee
and serve as a defense to the indemnity claim.
The District Court correctly ruled that Sentinel was not
entitled to indemnity in these circumstances.
III. The Tennessee Consumer Protection Act
Sentinel also asserts a claim under the Tennessee
Consumer Protection Act. Tenn. Code Ann. S 47-18-104 to
109. That statute prohibits unfair or deceptive acts or
practices affecting the conduct of any trade or business,
including the practices of insurance companies. Sentinel
contends that the issuance of the performance bonds fell
within the purview of the Act. We need not discuss the
merits of this claim, because it is time barred.
Tenn. Code Ann. S 47-18-110 provides that a cause of
action under the Act "shall be brought within one year from
a person’s discovery of the unlawful act or practice, but in
no event shall an action under Tenn. Code Ann. S 47-18-
109 be brought more than four years after the date of the
consumer transaction giving rise to the claim for relief." The
bonds were issued in February and November 1994, and
according to the findings of fact in the Tennessee Chancery
Court, the default occurred in 1997.
Defendants acknowledge that the "discovery of the
unlawful act or practice" may be considered to have been
established as of September 1, 1998, when a complaint
averring fraud against Namer, Quackenbush, and Universal
was filed in the United States District Court for the Western
District of Tennessee. However, the action before us was
not commenced until February 1, 2001. Under the one year
limitation period, Sentinel’s claim is barred.
Sentinel argues that the claim was timely under the
Tennessee "saving statute." Tenn. Code Ann.S 28-1-105(a).
This provision permits an otherwise untimely claim if it was
originally commenced within the statutory period, was
subject to disposition "against the plaintiff upon any
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ground not concluding the plaintiff ’s right of action," and
thereafter commenced within one year of that disposition.
However, Sentinel’s argument is unavailing. Its claims
under the Act were originally asserted against the
defendants in the third party complaint in the Tennessee
Chancery action, filed on December 6, 1999. Under the
date fixing the "discovery of the unlawful act or practice,"
that action is also beyond the one year limitation period.
Accordingly, the judgment of the District Court will be
affirmed.4
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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4. The District Court included Defendant Quackenbush it its Order
granting defendants’ motion to dismiss. We find no error in this
determination, and affirm the District Court’s Order in its entirety.
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