XL Sports, LTD. v. $1,060.000 Plus Interest Traceable to RES, and Jerry Lawler ( 2006 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
OCTOBER 11, 2005 Session
XL SPORTS, LTD. v. $1,060,000 PLUS INTEREST TRACEABLE TO
RESPONDENT, RES, and JERRY LAWLER
Direct Appeal from the Chancery Court for Shelby County
No. 00-0692-3 D. J. Alissandratos, Chancellor
No. W2005-00689-COA-R3-CV - Filed January 26, 2006
Following a transaction involving the sale of a business, the plaintiff filed suit against several
defendants in federal court alleging causes of action grounded in federal and state law. The federal
jury found some of the defendants liable, but they concluded that one of the defendants did not
engage in any wrongdoing during the transaction at issue. Thereafter, the plaintiff filed suit in a
Tennessee chancery court seeking to impose a constructive trust over funds held by the defendant
exonerated by the jury. The defendant removed the case to the federal district court. The district
court determined that the claim was barred by the doctrine of res judicata. The plaintiff appealed to
the federal court of appeals, which ruled that the case was not properly removable, as it only
presented a claim based upon state law. On remand to the chancery court, the defendant asserted the
affirmative defenses of res judicata and collateral estoppel. The chancery court subsequently granted
the plaintiff’s motion for summary judgment. The defendant appealed to this Court. We reverse the
chancellor’s grant of summary judgment to the plaintiff, and we hold that the plaintiff’s claim for
a constructive trust is barred by the doctrines of res judicata and collateral estoppel. Accordingly,
we dismiss the case in its entirety.
Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Reversed; Case
Dismissed
ALAN E. HIGHERS, J., delivered the opinion of the court, in which DAVID R. FARMER , J., and HOLLY
M. KIRBY , J., joined.
Leonard W. Yelsky, Cleveland, OH; Joseph D. Barton, Millington, TN, for Appellant
Larry E. Parrish, Memphis, TN, for Appellee
OPINION
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
This case involves a tortured procedural history which began in the federal courts and
involved multiple parties.1 We are presently asked to resolve an aspect of the dispute involving XL
Sports, Ltd. (hereinafter “XL Sports” or “Appellee”) and Jerry Lawler (hereinafter “Lawler” or
“Appellant”). In order to properly characterize the present controversy, we borrow the following
statement of facts from the most recent opinion issued by the United States Court of Appeals for the
Sixth Circuit in this case:
The United States Wrestling Association, or USWA, was a
trade name used to designate a wrestling entertainment business
based in Memphis, Tennessee. The USWA distributed a weekly
wrestling television show and promoted periodic live wrestling
events.
For 20 years prior to October of 1996, the USWA had been
co-owned by the same two men: Jerry Jarrett and the defendant, Jerry
Lawler — the latter known to wrestling afficionados as “The King.”
Jarrett had initially owned a majority interest in the business, but he
and Lawler each held a 50% share by 1996.
Jarrett testified that although the USWA had been highly
profitable in the 1980s, it was regularly losing money by the
mid-1990s. Lawler nonetheless approached Jarrett in the summer of
1996 with an offer to purchase Jarrett’s half of the business. Jarrett,
who said that he was burned out after spending many years in the
world of professional wrestling, was willing to sell. By an agreement
dated November 15, 1996, Jarrett undertook to sell his half of the
business to Lawler for $250,000.
Despite the USWA’s red ink, Lawler entered into an
employment contract in October of 1996 with a man known as Larry
Burton, promising to pay Burton $750,000 in 52 equal installments.
It is unclear precisely what consideration Burton was to render under
his employment contract. Furthermore, the parties disagree as to
whether Burton was working for Lawler personally or for the USWA.
But Lawler does admit that the employment contract contained
monetary incentives for Burton if he helped increase the revenue of
the business.
1
See XL Sports, Ltd. v. Lawler, No. 01-5363, 2002 U.S. App. LEXIS 21168 (6th Cir. Oct. 8, 2002); Burton
v. Selker, Nos. 99-3777, 99-3778, 99-3779, 00-3095, 2002 U.S. App. LEXIS 2771 (6th Cir. Feb. 19, 2002); In re XL
Sports, Ltd., 234 F.3d 1271 (6th Cir. 2000) (per curiam); Burton v. Selker, 36 F. Supp. 2d 984 (N.D. Ohio 1999).
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At the same time he was sounding out Jarrett about selling,
Lawler was working on a deal to sell Burton the entire business.
Lawler and Burton signed a letter of agreement in December of 1996
under which Lawler undertook to sell “all or part” of the wrestling
business at a price of $500,000 for each 25% share. Burton
represented in the letter that he would pay $500,000 for one such
share within the next week. The letter gave Burton the option to
increase his ownership interest by paying an additional $500,000 for
each additional 25% interest he elected to take, as long as the
payments were made within specified periods during the succeeding
360 days.
In the meantime, Burton entered into a separate but related
agreement with a man named Mark Selker. Selker, according to a
letter dated December 13, 1996, promised to contribute $250,000
toward Burton’s purchase of the initial 25%. Selker further agreed to
bear half the cost if and when the options to purchase the remaining
75% were exercised. In order to carry out his part of this transaction,
Selker formed a limited liability company, XL Sports, Ltd., the
plaintiff in the matter now before us.
In December of 1996 Lawler honored his agreement to
purchase Jarrett’s half of the wrestling business by paying $187,500
to Jarrett and $62,500 to Burton. (The latter payment was described
as a commission for Burton’s work in helping to arrange the sale.) At
about the same time, Lawler received $250,000 from XL in partial
payment for the first 25% increment.
By June 6, 1997, according to a letter of that date, Burton and
Selker had paid Lawler a total of $1,100,000; they proposed to pay
$900,000 more within a week, thereby acquiring 100% of the
business. Lawler agreed to the terms set forth in the June 6 letter, and
on June 20, 1997, he executed a notarized bill of sale transferring all
of the USWA’s assets to XL.
On November 21, 1997, XL filed a voluntary petition for
bankruptcy in the United States Bankruptcy Court for the Western
District of Tennessee. A few days later, acting as
debtor-in-possession, the company instituted an adversary proceeding
against Lawler in the bankruptcy court. The stated object of this
proceeding was to avoid, under the provisions of 11 U.S.C. § 548(a),
what XL claimed to have been a fraudulent transfer of the USWA
business.
In addition, XL sued Lawler, Burton and several other
individuals in the United States District Court for the Western District
of Tennessee. The complaint, which sought damages and equitable
relief under the Racketeer Influenced and Corrupt Organizations Act,
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charged the defendants not only with racketeering, but with common
law conversion, fraud, and conspiracy to injure XL’s business.
Burton filed his own complaint against Mark Selker, the latter’s
father Eugene Selker, and the Selkers’ law firm, alleging legal
malpractice, interference with business relationships, and fraud.
Lawler, for his part, instituted an action seeking damages from
Burton, the Selkers, the Selkers’ law firm, and that firm’s other name
partner. Numerous cross-claims and counter-claims followed. All
three of these cases were eventually consolidated and transferred to
the United States District Court for the Northern District of Ohio in
Cleveland, where they went to trial before a jury.
The Cleveland jury reached a verdict, on which judgment was
entered, finding that Burton and his son, Jayson Bertman, had
engaged in racketeering. Damages totaling $865,000 were assessed
against them. (The judgment was later amended to reflect that Burton
and Bertman were jointly and severally liable for this amount, and
that XL was entitled to treble damages, or $ 2,595,000, under 18
U.S.C. § 1964(c).) The jury also found Burton liable for conversion
and fraud, with respect to which $235,000 was awarded in
compensatory damages and $3,300,000 in punitive damages. Finally,
the jury found in favor of Lawler as to all of XL’s claims against him.
In this connection the jury explicitly found that XL had failed to
prove that Lawler had wrongfully exercised dominion over XL’s
property in denial of XL’s rights to that property. The court directed
a $ 1,000,000 verdict for Lawler in his suit against Burton, an amount
Burton had previously admitted to owing.2
Two weeks after the entry of judgment in the Cleveland case,
XL moved for summary judgment in its adversary proceeding against
Lawler. XL asserted that the recent trial had resolved all factual
issues in its favor and that, under 11 U.S.C. § 544(b) and the common
law of Tennessee, Lawler was bound to deliver $1,100,000 to the
bankruptcy estate. Lawler countered with a motion for judgment on
the pleadings in which he asserted that the claims advanced in XL’s
adversary proceeding were barred by the judgment in the Cleveland
case. The bankruptcy court denied both motions.
XL Sports, Ltd. v. Lawler, No. 01-5363, 2002 U.S. App. LEXIS 21168, at *3–9 (6th Cir. Oct. 8,
2002) (footnotes omitted).
2
The various rulings by the district court during the pendency of the trial and the jury’s verdict were appealed
to the United States Court of Appeals for the Sixth Circuit, which affirmed the district court’s rulings and the jury’s
verdict in all respects. See Burton v. Selker, Nos. 99-3777, 99-3778, 99-3779, 00-3095, 2002 U.S. App. LEXIS 2771(6th Cir. Feb. 19, 2002).
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On April 11, 2000, XL Sports filed a complaint against Lawler in the Chancery Court of
Shelby County asserting the following: “[XL Sports] contends that Lawler, as the recipient of the
$1,100,000 finally adjudged to have been stolen from [XL Sports], is, as a matter of law, a
constructive trustee of [XL Sports] required, as a matter of law, to turn over the $1,100,000, with
interest, to [XL Sports].”3 In essence, XL Sports maintained that, since the jury in the federal case
found that Burton and other defendants were guilty of unlawfully taking the $1,100,000.00 from XL
Sports, Lawler, even though the jury found that he had no culpability in the taking, could be
considered a constructive trustee of the $1,100,000.00 paid to him over the course of the transaction.
In response to XL Sports’ complaint, Lawler filed a notice of his intention to remove the case to the
United States District Court for the Western District of Tennessee. Once the suit landed in the
district court, XL Sports moved to have the case remanded to the chancery court, which the district
court handled as follows: “The district court denied the remand and, at Lawler’s request, withdrew
the reference of XL’s adversary proceeding to the bankruptcy court. The adversary proceeding and
the removed Tennessee suit were then consolidated, after which the district court entered judgment
in favor of Lawler on res judicata grounds.” XL Sports, Ltd., 2002 U.S. App. LEXIS 21168, at *9.
An appeal to the United States Court of Appeals for the Sixth Circuit followed. Id.
On appeal, the federal court of appeals considered the issue of whether the case could be
properly removed from the chancery court to the district court. Id. at *9. At the outset, the court of
appeals made the following observation: “Although it is true that [XL Sports’] Tennessee complaint
alleges that the prior federal suit established some of the facts relevant to the company’s constructive
trust claim, the complaint invokes only the common law of Tennessee as a basis for relief.” Id. at
*15–16. In subsequently ruling that XL Sports’ complaint filed in the chancery court was not
properly removable to the district court, the court of appeals stated as follows:
All of which brings us, at last, to the district court’s holding
that the claims advanced in XL’s adversary proceeding are barred
under the doctrine of res judicata. Relying mainly on an unpublished
Tennessee Chancery Court case, Gindt v. Beaty, No. 101372-3
(January 26, 1993), XL argues that neither of its claims is precluded
because both are directed against the supposedly stolen money in rem
and not against Lawler in personam. In addition, XL asserts that the
judgment entered in the Cleveland case precludes Lawler from
challenging its claim that the money transferred to his bank accounts
was obtained by fraud.
....
3
As the United States Court of Appeals for the Sixth Circuit noted, XL Sports apparently filed this suit in
response to statements made by the bankruptcy judge during a conference with the parties to the bankruptcy proceeding.
XL Sports, Ltd., 2002 U.S. App. LEXIS 21168, at *9.
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The doctrine of res judicata, or “claim preclusion,” as one
branch of the doctrine has come to be called in academic circles,
prohibits parties or their privies from relitigating claims that were or
could have been decided in a previous action between the same
parties, where the previous action has ended in a final judgment on
the merits. Kane v. Magna Mixer Co., 71 F.3d 555, 560 (6th Cir.
1995). XL and Lawler were both parties to a lawsuit based on the
facts at issue here, which lawsuit ended with a final judgment
reflecting a finding by the jury that Lawler had not wrongfully
exercised dominion over XL’s property in denial of XL’s rights. In
the present case, however, XL acts as a debtor in possession, seeking
to exercise the right of a trustee to avoid a fraudulent transfer. See 11
U.S.C. § 1107(a). A trustee in bankruptcy “represents the interest of
all creditors of the Debtor’s bankruptcy estate,” and is therefore not
generally considered to be in privity with the debtor. See In re Fordu,
201 F.3d 693, 705-06 (6th Cir. 1999). A debtor in possession may
likewise act as a representative of the bankruptcy creditors. See Ford
Motor Credit Co. v. Weaver, 680 F.2d 451, 462 n.8 (6th Cir. 1982).
Under XL’s theory of this case, Lawler is a constructive
trustee for funds that were stolen from XL, the constructive
beneficiary. XL argues that under Gindt and the Tennessee cases
cited therein, such a beneficiary retains title to those funds held in
trust that can be traced. See, e.g., State ex rel. Robertson v. Thomas
W. Wrenne & Co., 170 Tenn. 131, 92 S.W.2d 416, 417 (Tenn. 1936)
(holding that when a trustee bank commingles its own funds with the
beneficiary’s, the trustee is presumed to withdraw its own funds first).
The company makes no mention of any creditor who would be able
to assert this Tennessee law claim that ultimately underlies its §
544(b) action.
As Gindt framed it, the key question for a claimant like XL is
whether, “where the [stolen] property can be traced, the rightful
owner is entitled to recover that which belongs to him.” (Emphasis
added.) As is not true under the state fraudulent transfer statutes that
are usually the subject of § 544(b) cases, Gindt confers no
independent cause of action on creditors. Tennessee’s Fraudulent
Conveyance Act, in contrast, specifically provides that a creditor may
“have the [fraudulent] conveyance set aside or obligation annulled to
the extent necessary to satisfy the creditor’s claim.” Tenn. Code Ann.
§ 66-3-310(1). It appears that XL, as the debtor in possession, can
only assert a § 544(b) Gindt claim insofar as it steps into the shoes of
the “rightful owner.” Here the alleged “rightful owner” is XL itself.
If XL is in fact the rightful owner of the $ 1.1 million it
transferred to Lawler, the issue before us is whether XL’s Gindt claim
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under § 544(b) is barred by the doctrine of res judicata. In the prior
Cleveland case, XL asserted several common law causes of action
against Lawler, including fraud and conversion, but did not mention
its claim under Gindt. The jury exonerated Lawler. The entry of
judgment on the jury’s verdict precludes XL from now going after
Lawler on the theory underlying the adversary proceeding, that theory
being one that could have been asserted in a prior suit between the
same parties in which there is now a final judgment on the merits. In
light of the fact that the Gindt claim could only be asserted by XL
itself, and not by its creditors, the doctrine of res judicata precludes
the company from asserting its claim as a debtor in possession. Cf.
In re Marlar, 267 F.3d 749, 756 (8th Cir. 2001) (finding that a
creditor who already sued under a state fraudulent transfer act could
not benefit from a subsequent suit by a trustee under § 544(b), even
though other creditors might); In re Hansler, 988 F.2d 35, 37-38 (5th
Cir. 1993) (finding that a prior state court judgment precluded a
contrary judgment in a non-core bankruptcy proceeding).
Id. at *25–30 (footnotes omitted).
Once the case had been returned to the chancery court, Lawler filed a motion to dismiss XL
Sports’ complaint or, in the alternative, a motion for summary judgment asserting that the complaint
was barred under the doctrines of res judicata and collateral estoppel. On December 9, 2002, XL
Sports, designating itself as a Debtor in Bankruptcy,4 amended its complaint filed in the chancery
court “by deleting the complaint in its entirety and in its place and stead, states its cause of action
against $1,060,000, Plus Interest, Traceable to Respondent (hereinafter “Res”) and against
respondent, Jerry Lawler.” In its amended complaint, XL Sports alleged the following: “[XL
Sports] contends that Lawler, as the person to whom the Res was physically delivered, and who
thereafter exercised dominion and control over the Res, as a matter of law, is a constructive trustee
of [XL Sports] required, as a matter of law, to turn over the Res, with interest, to [XL Sports].”
According to XL Sports, Lawler admitted during the trial in federal district court that he received
the $1,060,000.00 sought by XL Sports and that he dispersed a portion of the funds to various
individuals or entities. XL Sports also maintained that the opinion by the United States Court of
Appeals for the Sixth Circuit issued on October 8, 2002 constituted the law of the case.
On December 11, 2002, XL Sports filed its response to Lawler’s motion to dismiss the
complaint. Therein, XL Sports made the following assertion: “The Sixth Circuit positively decided
that the final judgment of the federal court in Cleveland has no preclusive effect via res judicata or
any other doctrine that inhibits or otherwise negatively impacts the entitlement of XL to the relief
4
Specifically, XL Sports noted the following: “Debtor files this case in its capacity as a debtor in bankruptcy
but not as a debtor-in-possession serving as the trustee of the bankruptcy estate by the petition filed in the United States
Bankruptcy Court for the W estern District of Memphis, Tennessee . . . .”
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sought by XL in this Court. . . . Frankly, while this Court certainly would not have been precluded
from making a determination as to whether the final judgment in the federal court in Cleveland
presented a res judicata or collateral estoppel bar in this Court, the appellate decision of the Sixth
Circuit on the question precludes further consideration of the question in this Court.” The very next
day, XL Sports filed its motion for summary judgment. On December 18, 2002, Lawler answered
XL Sports amended complaint reasserting as a defense that XL Sports’ claims were barred by res
judicata and collateral estoppel.
On January 3, 2003, the chancery court entered an order denying Lawler’s motion to dismiss.
The chancellor also noted that it was presented with issues of first impression in this case, therefore,
it granted Lawler’s oral motion for interlocutory appeal. On March 18, 2003, this Court denied
Lawler’s application for an interlocutory appeal. Lawler appealed the denial of his interlocutory
appeal to the Tennessee Supreme Court, which issued an order on September 2, 2003 denying
Lawler’s application for discretionary review. See XL Sports, Ltd. v. Lawler, No. W2003-00102-
SC-R9-CV, 2003 Tenn. LEXIS 791, at *1 (Tenn. Sept. 2, 2003). On February 11, 2004, Lawler filed
his response to XL Sports’ motion for summary judgment in the chancery court. On February 25,
2004, the chancery court entered an order granting XL Sports’ motion for summary judgment.
Lawler subsequently filed a motion asking the chancery court to alter or amend its judgment, which
the court denied on March 24, 2005. Thereafter, Lawler filed a timely notice of appeal to this Court.
Both parties have presented a myriad of issues for review by this Court. All of these issues
are subsumed within the overriding issue we are asked to resolve: whether the chancery court erred
in granting summary judgment to the Appellee in this case. After reviewing the record submitted
on appeal, we reverse.
II.
STANDARD OF REVIEW
In reviewing this case on appeal, we employ the following standard of review:
[T]his case comes to us following the grant of a motion for summary
judgment. The standard for reviewing a grant of summary judgment
is de novo without any presumption that the trial court’s conclusions
were correct. See Mooney v. Sneed, 30 S.W.3d 304, 306 (Tenn.
2000). Summary judgment is appropriate only when the moving
party demonstrates that there are no genuine issues of material fact
and that he or she is entitled to judgment as a matter of law. See
Tenn. R. Civ. P. 56.04; Penley v. Honda Motor Co., 31 S.W.3d 181,
183 (Tenn. 2000); Byrd v. Hall, 847 S.W.2d 208, 210 (Tenn. 1993).
In reviewing the record, “courts must view the evidence in the light
most favorable to the nonmoving party and must also draw all
reasonable inferences in the nonmoving party’s favor.” Staples v.
CBL & Assocs., Inc., 15 S.W.3d 83, 89 (Tenn. 2000). “If both the
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facts and conclusions to be drawn therefrom permit a reasonable
person to reach only one conclusion, then summary judgment is
appropriate.” Seavers v. Methodist Med. Ctr., 9 S.W.3d 86, 91 (Tenn.
1999).
Brooks v. Bd. of Prof’l Responsibility of the Supreme Court of Tenn., 145 S.W.3d 519, 524
(Tenn. 2004).
III.
DISCUSSION
When XL Sports filed its lawsuit in federal court, it sought damages and equitable relief
based on allegations that Lawler, Burton, and other defendants engaged in conduct which violated
the federal racketeering statutes. See XL Sports, Ltd. v. Lawler, No. 01-5363, 2002 U.S. App.
LEXIS 21168, at *6–7 (6th Cir. Oct. 8, 2002). In addition to its federal law claim, XL Sports sought
to recover under the common law theories of conversion, fraud, and conspiracy to injure XL Sports’
business. Id. at *7. As the federal court of appeals noted, the jury found Burton liable for
conversion and fraud, but it “explicitly found that XL had failed to prove that Lawler had wrongfully
exercised dominion over XL’s property in denial of XL’s rights to that property.” Id. at *8. On
appeal, XL Sports asserts that, based on the verdict, the jury found that the money held by Lawler
was stolen from XL Sports, but Lawler was not the thief.
The complaint filed by XL Sports in the chancery court has been referred to by the parties
and the federal court of appeals as a “Gindt claim.” On January 26, 1993, Chancellor D.J.
Alissandratos of the Chancery Court of Shelby County issued an opinion in a case entitled Gindt v.
Beaty, No. 101372-3. In Gindt, a client gave his lawyer $312,364.68 to be held in escrow and
applied toward the purchase of a residence. However, the lawyer began to utilize the funds to pay
personal obligations he owed to other individuals. Thereafter, the plaintiff filed suit against the
individuals who received the funds from the lawyer seeking to recover the funds. The chancellor
ruled that the plaintiff was entitled to trace the funds paid to the lawyer “and recover these sums by
imposing a constructive trust upon these funds.” Relying on the trial court’s order in Gindt, XL
Sports asserted that it too could seek a constructive trust as to the funds received by Lawler from the
transaction entered into between the parties. On appeal, Lawler argues that the chancellor in the
present case erred by granting summary judgment to XL Sports because its Gindt claim is barred by
the doctrines of res judicata and collateral estoppel. Specifically, Lawler maintains that XL Sports
should have brought its claim for a constructive trust in the case filed in federal court. Moreover,
Lawler argues that the jury exonerated him of any wrongdoing, therefore, XL Sports’ attempts to
impose a constructive trust on the funds in his possession must fail for that reason as well. We
agree.
It is well established that a prior judgment in one case may have preclusive effect in a
subsequent action under both the related but distinct doctrines known as res judicata and collateral
estoppel. See Massengill v. Scott, 738 S.W.2d 629, 631 (Tenn. 1987); see also Cromwell v. County
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of SAC, 94 U.S. 351, 352–55 (1877) (discussing the distinguishing characteristics between claim
preclusion and issue preclusion); King v. Brooks, 562 S.W.2d 422, 423–24 (Tenn. 1978) (noting the
differences between the doctrines of res judicata and collateral estoppel).
Res judicata is a claim preclusion doctrine which is intended to promote finality in litigation.
Moulton v. Ford Motor Co., 533 S.W.2d 295, 296 (Tenn. 1976). It constitutes an affirmative
defense which must be plead specially. See Tenn. R. Civ. P. 8.03 (2005); Usrey v. Lewis, 553
S.W.2d 612, 614 (Tenn. Ct. App. 1977). “The principle of claim preclusion prevents parties from
splitting their cause of action and requires parties to raise in a single lawsuit all the grounds for
recovery arising from a single transaction or series of transactions that can be brought together.”
Bernard v. Sumner Reg’l Health Sys., No. M2002-02962-COA-R3-CV, 2003 Tenn. App. LEXIS
898, at *11 (Tenn. Ct. App. Dec. 22, 2003) (citations omitted); see also Boyd v. Bruce, No. M2000-
03211-COA-R3-CV, 2001 Tenn. App. LEXIS 816, at *9 (Tenn. Ct. App. Nov. 2, 2001). In order
to prevail, a party asserting res judicata as a bar to subsequent litigation must prove the following:
(1) that the underlying judgment was rendered by a court of
competent jurisdiction; (2) that the same parties were involved in
both suits; (3) that the same cause of action was involved in both
suits; and (4) that the underlying judgment was on the merits.
Lee v. Hall, 790 S.W.2d 293, 294 (Tenn. Ct. App. 1990) (citations omitted). The parties do not
contest that the federal court had both in personam and subject matter jurisdiction in this matter, nor
do they contest that the federal court’s judgment constituted a resolution of the case on its merits.
We begin by examining whether the parties involved in both suits are the same. When XL
Sports originally filed its complaint in the chancery court, it did so as a debtor in possession. After
the case was removed to the federal district court and ultimately reached the federal court of appeals,
the court of appeals ruled as follows:
The jury exonerated Lawler. The entry of judgment on the jury’s
verdict precludes XL from now going after Lawler on the theory
underlying the adversary proceeding, that theory being one that could
have been asserted in a prior suit between the same parties in which
there is now a final judgment on the merits. In light of the fact that
the Gindt claim could only be asserted by XL itself, and not by its
creditors, the doctrine of res judicata precludes the company from
asserting its claim as a debtor in possession. Cf. In re Marlar, 267
F.3d 749, 756 (8th Cir. 2001) (finding that a creditor who already
sued under a state fraudulent transfer act could not benefit from a
subsequent suit by a trustee under § 544(b), even though other
creditors might); In re Hansler, 988 F.2d 35, 37-38 (5th Cir. 1993)
(finding that a prior state court judgment precluded a contrary
judgment in a non-core bankruptcy proceeding).
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XL Sports, Ltd., 2002 U.S. App. LEXIS 21168, at *30–31 (emphasis added). On remand to the
chancery court, XL Sports amended its complaint to reflect that it was seeking a constructive trust
simply as a business entity. On appeal to this Court, XL Sports seeks to subtly suggest that the
federal court of appeals held that the chancery court could not deem its complaint to be barred by
res judicata if it sued in its capacity as a business entity. However, the federal court of appeals was
asked to primarily decide whether XL Sports’ complaint could properly be removed to the federal
courts, stating that, “[o]n its face, the complaint filed by XL in the Tennessee Chancery Court asserts
state claims only.” XL Sports, Ltd., 2002 U.S. App. LEXIS 21168, at *12. When rendering its
decision that the case should not have been removed from the chancery court, the federal court of
appeals would necessarily refrain from issuing an opinion as to whether the state cause of action was
barred by the doctrine of res judicata in a state court. In its present posture, the case involves a
lawsuit filed by XL Sports as a business entity against Lawler, the same parties involved in the
original suit filed in federal court. Thus, as the federal court of appeals’ decision implies, it is left
to the courts of this state to decide whether XL Sports’ is barred by the doctrine of res judicata from
pursuing its constructive trust claim in the courts of this state.
The resolution of whether XL Sports’ claim is barred by the doctrine of res judicata turns on
whether the same cause of action is involved in both suits. Requiring the subsequent cause of action
to be identical in all respects to the original cause of action is too narrow a reading of the doctrine
of res judicata. See Bernard, 2003 Tenn. App. LEXIS 898, at *8. “It has long been the rule in this
state that not only issues which were actually determined, but all claims and issues which were
relevant and which could reasonably have been litigated in a prior action, are foreclosed by the
judgment therein.” Am. Nat’l Bank & Trust Co. of Chattanooga v. Clark, 586 S.W.2d 825, 826
(Tenn. 1979) (citing Jordan v. Johns, 79 S.W.2d 798, 802 (Tenn. 1935)); see also Nat’l Cordova
Corp. v. City of Memphis, 380 S.W.2d 793, 796 (Tenn. 1964); Bernard, 2003 Tenn. App. LEXIS
898, at *8; Whitsey v. Williamson County Bank, 700 S.W.2d 562, 564 (Tenn. Ct. App. 1985).
“This is true even though the prior case was in Federal Court and the subsequent suit is brought in
a State Court.” Whitsey, 700 S.W.2d at 564 (citing Paverite Inc. v. ITT Indus. Credit Co., 621
S.W.2d 759, 762 (Tenn. Ct. App. 1981)); see also Penn-America Ins. Co. v. Crittenden, 984
S.W.2d 231, 232–33 (Tenn. Ct. App. 1998).
The federal courts are given supplemental jurisdiction in the following circumstance:
Except as provided in subsections (b) and (c) or as expressly provided
otherwise by Federal statute, in any civil action of which the district
courts have original jurisdiction, the district courts shall have
supplemental jurisdiction over all other claims that are so related to
claims in the action within such original jurisdiction that they form
part of the same case or controversy under Article III of the United
States Constitution. Such supplemental jurisdiction shall include
claims that involve the joinder or intervention of additional parties.
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28 U.S.C. § 1367(a) (2003). “Pursuant to the long established doctrine of pendent jurisdiction, a
federal court exercising jurisdiction over a federal question may hear state law claims that derive
from a common nucleus of operative fact, such that the relationship between the federal claim and
the state claim permits the conclusion that the entire action before the court comprises but one
constitutional case.” 36 C.J.S. Federal Courts § 15 (2003) (citing City of Chicago v. Int’l Coll. of
Surgeons, 522 U.S. 156, 164–65 (1997)). Moreover, the federal courts have chosen to allow
multiple claims stemming from a single transaction to be heard in a single action. See Fed. R. Civ.
P. 8(a) (2005) (“Relief in the alternative or of several different types may be demanded.”); Fed. R.
Civ. P. 8(e)(2) (2005) (authorizing alternative or inconsistent pleading), Fed. R. Civ. P. 13 (2005)
(governing counterclaims and cross-claims); Fed. R. Civ. P. 14 (2005) (discussing third-party
practice); Fed. R. Civ. P. 18 (2005) (authorizing the joinder of claims and remedies).
“Constructive trusts are those which the law creates, independently of the intention of the
parties, to prevent fraud or injustice.” 90 C.J.S. Trusts § 174 (2002). Regarding the imposition of
a constructive trust in this state, our supreme court has stated as follows:
It is the well established rule in this State that a constructive
trust arises contrary to intention and in invitum, against one who, by
fraud, actual or constructive, by duress or abuse of confidence, by
commission of wrong, or by any form of unconscionable conduct,
artifice, concealment, or questionable means, or who in any way
against equity and good conscience, either has obtained or holds the
legal right to property which he ought not, in equity and good
conscience, hold and enjoy. Covert v. Nashville, C. & St. L. Railway
(1948) 186 Tenn. 142, 208 S.W.2d 1008, 1 A.L.R. 2d 154; Central
Bus Lines v. Hamilton Nat. Bank (1951) 34 Tenn.App. 480, 239
S.W.2d 583.
Sanders v. Forcum-Lannom, Inc., 475 S.W.2d 172, 174 (Tenn. 1972). Thus, our courts have
imposed a constructive trust in the following types of cases:
1) where a person procures the legal title to property in violation of
some duty, expressed or implied, to the true owner; 2) where the title
to property is obtained by fraud, duress or other inequitable means;
3) where a person makes use of some relation of influence or
confidence to obtain the legal title upon more advantageous terms
than could otherwise have been obtained; and 4) where a person
acquires property with notice that another is entitled to its benefits.
Intersparex Leddin KG v. Al-Haddad, 852 S.W.2d 245, 249 (Tenn. Ct. App. 1992); see also Tanner
v. Tanner, 698 S.W.2d 342, 345–46 (Tenn. 1985).
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In determining whether XL Sports’ constructive trust cause of action is barred by the doctrine
of res judicata, we employ the following standard: “Stated in transactional terms, [the doctrine]
provides that a valid and final judgment extinguishes all claims arising out of the same transaction
or series of transactions from which the cause of action arose.” Lowe v. First City Bank of
Rutherford County, No. 01-A-01-9305-CV-00205, 1994 Tenn. App. LEXIS 578, at *7–8 (Tenn.
Ct. App. Oct. 19, 1994) (no perm. app. filed); see also Restatement (Second) of Judgments § 24
(1982) (“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.”).
XL Sports’ constructive trust claim stems from the same transaction as its other claims,
which have already been litigated in federal court. The federal court had already accepted pendent
jurisdiction of XL Sports’ other common law claims grounded in state law. Compare Massengill
v. Scott, 738 S.W.2d 629, 630–31 (Tenn. 1987) (holding that the doctrine of res judicata did not bar
a cause of action filed in state court following a federal lawsuit because the federal court declined
to exercise its pendent jurisdiction over the plaintiff’s tort claims grounded in state law), with Penn-
America Ins. Co. v. Crittenden, 984 S.W.2d 231, 233 (Tenn. Ct. App. 1998) (“Implicit in the
holdings of both the District Court and the Sixth Circuit Court of Appeals, is the fact that this claim
could have been litigated in that action if it had been timely pled.”). Thus, XL Sports could have
sought the imposition of a constructive trust as another theory of recovery stemming from the same
injury XL Sports sued upon in federal court.
Moreover, XL Sports does not dispute that, in order to impose a constructive trust on the
proceeds held by Lawler, it must necessarily rely on the same facts previously litigated in the case
filed in federal court. As such, we are cognizant of the following:
Whether the first and second cause of action or claim are the
same depends on whether the issues, facts, [or] evidence . . . essential
to maintenance of the two actions are the same. Claims are not the
same for purposes of claim preclusion where the two causes of action
rest on different facts, and evidence of a different kind or character is
necessary to sustain them.
50 C.J.S. Judgments § 749 (1997). “The best and perhaps most invariable test as to whether a former
judgment is a bar is to inquire whether the same evidence will sustain both the present and the
former action.” Gulf Am. Fire & Cas. Co., 209 So. 2d 212, 216 (Ala. 1968); see also Bernard v.
Sumner Reg’l Health Sys., No. M2002-02962-COA-R3-CV, 2003 Tenn. App. LEXIS 898, at *9–11
(Tenn. Ct. App. Dec. 22, 2003) (stating that “[w]e find it obvious that both lawsuits stem from the
same set of facts” and concluding that the plaintiff’s subsequent claim was barred by the doctrine
of res judicata).
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In order to impose a constructive trust in a case of this nature, a trial court must necessarily
find some wrongdoing on the part of the trustee. See Sanders v. Forcum-Lannom, Inc., 475
S.W.2d 172, 174 (Tenn. 1972) (setting forth the conduct which will warrant the imposition of a
constructive trust); 90 C.J.S. Trusts § 176 (2002) (“In order that fraud or other wrongdoing may give
rise to a constructive trust, it must exist at the inception of title to the property, or inhere in the
transaction by which the trustee acquires the title, and fraudulent acts or omissions subsequent to the
acquisition of title and not connected therewith do not give rise to a constructive trust.”). As one
commentator has stated:
Where money is taken from the owner by a conscious
wrongdoer the owner may enforce either a constructive trust or an
equitable lien on the fund. Typically such remedies are invoked
against fiduciaries who have embezzled or otherwise misappropriated
funds, or against persons who have obtained money by fraud or
duress.
Dan B. Dobbs, Law of Remedies §5.16, at 423 (1973) (emphasis added).
In the original suit, XL Sports, in addition to its causes of action alleging a violation of
federal racketeering statutes, asserted that Lawler obtained the funds at issue by fraud and/or
conversion. The federal jury exonerated Lawler of any wrongdoing surrounding the transaction at
issue. In fact, the federal court of appeals noted that “XL and Lawler were both parties to a lawsuit
based on the facts at issue here, which lawsuit ended with a final judgment reflecting a finding by
the jury that Lawler had not wrongfully exercised dominion over XL’s property in denial of XL’s
rights.” XL Sports, Ltd., 2002 U.S. App. LEXIS 21168, at *27 (emphasis added). Therefore, the
facts which would give rise to the imposition of a constructive trust are the same facts which have
already been litigated in federal court.
Furthermore, even if XL Sports were entitled to assert a new cause of action against Lawler
in the chancery court, a related doctrine would prevent the parties from re-litigating the facts
necessary to proving the need for a constructive trust. “Under the doctrine of collateral estoppel,
when an issue has been actually and necessarily determined in a former action between the parties,
that determination is conclusive upon them in subsequent litigation.” King v. Brooks, 562 S.W.2d
422, 424 (Tenn. 1978). In Sutton v. Smith, No. 22, 1984 Tenn. App. LEXIS 2872, at *2 (Tenn. Ct.
App. May 15, 1984), an unmarried couple acquired real property titled in both of their names. The
female filed an action against the male to partition the property. Id. The trial court ruled in favor
of the female regarding ownership of the real property. Id. The male subsequently sought to impose
a constructive trust on the female’s interest in the real property. Id. at *1. In the original order
adjudicating the female’s complaint, the trial court found that the male “failed to prove to the
satisfaction of this Court that the plaintiff committed a fraud or under any other theory of law should
not be a tenant in common was to the interest involved in the property . . . .” Id. at *3. On appeal
to this Court, we held that, since the trial court already concluded that the female did not engage in
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fraud, the male was collaterally estopped from attempting to re-litigate that issue and impair rights
already established by a prior judgment. Id. at *4.
To be sure, the jury in the federal lawsuit has already determined that Lawler did not engage
in fraud or any other wrongdoing in acquiring the funds presently in his possession. Therefore, a
holding that Lawler engaged in conduct warranting the imposition of a constructive trust would
necessarily result in a finding contrary to the jury’s verdict. This we decline to do. See 50 C.J.S.
Judgments § 749 (1997) (noting that, in determining whether a subsequent action is barred, the
court’s may consider “whether the rights or interests established in the prior judgment would be
destroyed or impaired by the prosecution of the second action”). Accordingly, even if we were to
determine that XL Sports’ constructive trust cause of action was not barred by the doctrine of res
judicata, the doctrine of collateral estoppel would preclude XL Sports from establishing an essential
element of its claim (i.e., that Lawler engaged in wrongful conduct).
In holding that, since XL Sports filed its claim for a constructive trust as a debtor in
possession, the constructive trust claim was barred by the doctrine of res judicata, the federal court
of appeals stated as follows:
In the prior Cleveland case, XL asserted several common law causes
of action against Lawler, including fraud and conversion, but did not
mention its claim under Gindt. The jury exonerated Lawler. The
entry of judgment on the jury’s verdict precludes XL from now going
after Lawler on the theory underlying the adversary proceeding, that
theory being one that could have been asserted in a prior suit between
the same parties in which there is now a final judgment on the merits.
XL Sports, Ltd. v. Lawler, No. 01-5363, 2002 U.S. App. LEXIS 21168, at *30 (6th Cir. Oct. 8,
2002). We hold that XL Sports is now precluded from seeking to impose a constructive trust against
Lawler in its capacity as a business entity for the same reasons the federal court of appeals refused
to allow XL Sports to proceed with its claim as a debtor in possession.
IV.
CONCLUSION
As this Court has previously stated,
[t]his Court cannot accept the argument of [Appellee] that, by
disclaiming or failing to present a particular fact or theory supporting
his action, a plaintiff may thereby reserve and preserve the disclaimed
and unpresented fact or theory as an ‘ace in the hole’ to be used as a
ground for a second lawsuit based on such ground. To assent to [the
Appellee’s] insistence would be to condone piecemeal presentation
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of suits and defenses at the whim of the parties. Such is not the
policy of our law and is contrary to the authorities set out above.
Bernard v. Sumner Reg’l Health Sys., No. M2002-02962-COA-R3-CV, 2003 Tenn. App. LEXIS
898, at *9 (Tenn. Ct. App. Dec. 22, 2003). Although the underlying facts are not in dispute, the
chancery court erred as a matter of law in granting summary judgment to the Appellee in this case,
therefore, we reverse that ruling. Instead, we hold that the Appellee’s present claim is barred by the
doctrines of res judicata and collateral estoppel, therefore, we dismiss the case in its entirety. Costs
of this appeal are to be taxed to the Appellee, XL Sports, Ltd., for which execution may issue if
necessary.
___________________________________
ALAN E. HIGHERS, JUDGE
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