242 F.3d 100 (2nd Cir. 2001)
DIRK EPPERSON and BETTY SCHNEIDER, Plaintiffs-Appellants,
v.
ENTERTAINMENT EXPRESS, INC., now known as Advantix, Inc., IRVIN RICHTER, HILL INTERNATIONAL, INC., and HILL ARTS & ENTERTAINMENT SYSTEMS, INC., now known as Haesi Software, Inc., Defendants-Appellees.
Docket No. 00-7567
August Term, 2000
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Argued: November 28, 2000
Decided: March 07, 2001
Appeal from an order of the United States District Court for the District of Connecticut (Dominic J. Squatrito, Judge) dismissing plaintiffs-appellants' claims for lack of subject matter jurisdiction.
VACATED and REMANDED.[Copyrighted Material Omitted]
ROBERT SULLIVAN, Westport, CT, for Plaintiffs-Appellants.
CAROLYN W. KONE, Brenner, Saltzman & Wallman, LLP, New Haven, CT, for Defendants-Appellees.
Before: VAN GRAAFEILAND and KATZMANN, Circuit Judges and JONES, District Judge.
JONES, District Judge:
Introduction
This case requires us to consider whether this Court's decision in Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F. 2d 295 (2d Cir. 1927), survives the Supreme Court's ruling in Peacock v. Thomas, 516 U.S. 349 (1996). We hold that it does. Having decided on the basis of Empire Lighting that the district court had jurisdiction over this action, we also hold that the appellants are not precluded from bringing this suit and the district court erred in dismissing it.
We vacate and remand.
I. BACKGROUND
On October 4, 1995, the appellants filed a diversity action ("the first action") in the United States District Court for the District of Connecticut against Hill Arts and Entertainment Systems, Inc. ("HAESI") seeking damages for breach of a software development contract and an unpaid account. In October 1996, appellants learned that HAESI had previously sold substantially all of its assets in May of 1996 to Entertainment Express, Inc. ("Express"). After HAESI failed to appear and to comply with the district court's discovery orders, the court granted a default judgment against it on February 11, 1997.
On March 12, 1997, after the default judgment against HAESI was granted but before its entry, the appellants amended the complaint in the first action. The amended complaint incorporated the two contract claims alleged in the original complaint and added two new claims and three new defendants: Express, Hill International, Inc. ("Hill") and Irvin Richter ("Richter"). The new third claim alleged that Richter and Hill owned and controlled HAESI and that by virtue of the unity of interest and ownership between the three defendants Hill and Richter should be held liable for HAESI's obligations on an alter ego theory. The fourth claim specifically alleged that HAESI's May 1996 asset sale to defendant Express was a fraudulent conveyance. Both the original and amended complaints asserted the diversity of citizenship of the parties under 28 U.S.C. § 1332 as the basis for subject matter jurisdiction.
On June 30, 1997, the appellees moved to dismiss the amended complaint on the ground that diversity no longer existed. They argued that as of the date of the amended complaint defendant Express (which at this point had changed its name to Advantix, Inc.) had shifted its corporate governance from Connecticut to California making it a California citizen and destroying diversity.
On March 23, 1998 the district court dismissed the amended complaint against the appellees for lack of subject matter jurisdiction because the parties lacked complete diversity. The court concluded that both the appellants and appellee Express were citizens of California. The district court subsequently denied appellants' motion for reconsideration without opinion in a summary order.
Appellants did not appeal the decision. Rather, on April 27, 1999 they filed a new action ("the second action") in the District of Connecticut. The first claim essentially mirrored the fraudulent conveyance claim in the amended first action, alleging that HAESI fraudulently conveyed its assets to defendant Advantix, Inc. The second claim alleged that HAESI had fraudulently granted liens in its property in favor of Hill and/or Richter and that the liens lacked consideration and were not properly perfected. The complaint pled the court's inherent enforcement jurisdiction as the basis of subject matter jurisdiction, acknowledging the lack of diversity among the parties. Notably, plaintiffs did not plead alter ego as a basis for liability in this second action. On March 31, 2000 the district court dismissed the second action for lack of subject matter jurisdiction.
In its opinion the district court noted that the appellants sought to enforce a prior default judgment entered against HAESI and that they were proceeding on a fraudulent conveyance theory. The court acknowledged that federal courts have ancillary jurisdiction to enforce their judgments, but held that plaintiffs' fraudulent conveyance claims fell outside the court's ancillary jurisdiction. Citing Peacock, the court found that the fraudulent conveyance claims were "based on new theories of liability that were not asserted in the original complaint" and required an independent basis for jurisdiction. Since the court had determined that the parties lacked diversity, it held that it lacked subject matter jurisdiction and dismissed the action. That decision is the subject of this appeal.
II. DISCUSSION
A. Jurisdiction
We begin with the question of whether the district court had jurisdiction to consider the second action -- a question we review de novo. See In re Vogel Van & Storage, Inc., 59 F.3d 9, 11 (2d Cir. 1995).
The seminal case in this Circuit is Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F.2d 295 (2d Cir. 1927). There, the plaintiff obtained a judgment against the Practical Company for infringement of a design patent. Thereafter, it filed a "supplemental bill" alleging that the Practical Company had fraudulently transferred its assets to the Perfect Company and a Mr. Aarons for the purpose of preventing plaintiff from recovering its judgment. The District Court found that the transfer had in fact been made to prevent the execution of plaintiff's judgment and awarded judgment against the Perfect Company for the amount of profits due to the plaintiff from the Practical Company.
On appeal, the Second Circuit first considered whether the action against the Perfect Company came within the ancillary jurisdiction of the district court, "regardless of the fact that there was no diversity of citizenship between the parties." Id. at 296. Writing for the Court, Judge Learned Hand answered that question in the affirmative:[W]e think that the District Judge was right in concluding that out of it might be spelled enough to support it as a bill to set aside a fraudulent conveyance. As such it was within the ancillary jurisdiction of the District Court, regardless of the fact that there was no diversity of citizenship between the parties. A fraudulent conveyance is void under the New York statute, and may be disregarded, even by a creditor whose judgment is entered afterwards. A suit to set it aside is not therefore essential, but is only an alternative remedy. It clears the title of the creditor in limine, and is in aid of the principal purpose of the suit; it "is in substance an equitable execution."
20 F.2d at 296-97 (internal citations omitted).
In so holding, the Court distinguished H.C. Cook Co. v. Beecher, 172 F. 166 (D. Conn. 1909), aff'd, 217 U.S. 497 (1910):
Cook v. Beecher was quite another case. There the plaintiff tried to hold the directors of a company upon their liability as such for a judgment rendered against it. Such a liability is not an incident to the collection of the judgment itself, but an independent cause of action.
Empire Lighting, 20 F.2d at 297 (citations omitted).
Thus, in this Circuit, under Empire Lighting, a distinction for jurisdictional purposes exists between an action to collect a judgment (as in Empire Lighting) and an action to establish liability on the part of a third party (as in Beecher). The former does not require an independent jurisdictional basis and may proceed even if the parties are non-diverse. The latter must have its own source of federal jurisdiction, so that absent an independent basis for federal jurisdiction a new defendant may not be haled into federal court. If Empire Lighting remains good law, the conclusion seems inescapable: because the second action in this case was a suit to set aside a fraudulent conveyance (and not to establish liability) "it was within the ancillary jurisdiction of the District Court." Id. at 296.
Appellees' principal argument is that Empire Lighting is no longer good law after the Supreme Court's decision in Peacock v. Thomas, 516 U.S. 349 (1996). We disagree.
In Peacock, plaintiff Thomas prevailed on an ERISA claim against his employer in the district court. While the judgment was on appeal, an officer and shareholder of the employer company named Peacock settled many of the employer's accounts. Thomas failed to execute on the judgment pending appeal, and was unsuccessful in collecting on the judgment after its affirmance by the court of appeals. Thomas thereafter sued Peacock personally in federal court, alleging fraudulent conveyance of the company's assets to prevent satisfaction of the ERISA judgment, and later added a claim to pierce the corporate veil. The district court pierced the corporate veil and entered a judgment against Peacock in "the precise amount of the judgment" against the employer. Id. at 352. The court of appeals affirmed, holding that the district court had ancillary jurisdiction over the suit against Peacock.
The Supreme Court agreed to hear Peacock's appeal and framed the issue as "whether federal courts possess ancillary jurisdiction over new actions in which a federal judgment creditor seeks to impose liability for a money judgment on a person not otherwise liable for the judgment." Id. at 351. Focusing first on the two distinct branches of ancillary jurisdiction, the Court stated:
[A] federal court may exercise ancillary jurisdiction "(1) to permit disposition by a single court of claims that are, in varying respects and degrees, factually interdependent and (2) to enable a court to function successfully, that is, to manage its proceedings, vindicate its authority, and effectuate its decrees."
Peacock, 516 U.S. at 354 (quoting Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 379-80 (1994)). The Court held that for ancillary claims having a factual and logical dependence on "the primary lawsuit," such claims "will not support federal jurisdiction over a subsequent lawsuit." See id. at 355.
For the enforcement branch of ancillary jurisdiction however, the Court stated:
We have reserved the use of ancillary jurisdiction in subsequent proceedings for the exercise of a federal court's inherent power to enforce its judgments. Without jurisdiction to enforce a judgment entered by a federal court, "the judicial power would be incomplete and entirely inadequate to the purposes for which it was conferred by the Constitution." In defining that power, we have approved the exercise of ancillary jurisdiction over a broad range oF.Supp.lementary proceedings involving third parties to assist in the protection and enforcement of federal judgments -- including attachment, mandamus, garnishment, and the prejudgment avoidance of fraudulent conveyances.
Id. at 356 (internal citations omitted).
The Court also noted that it had "never authorized the exercise of ancillary jurisdiction in a subsequent lawsuit to impose an obligation to pay an existing federal judgment on a person not already liable for that judgment." Id. at 357. Significantly, it immediately gave definition to the phrase "person not already liable for that judgment" by describing the veil-piercing claims in H.C. Cook Co. v. Beecher and concluding that "Beecher governs this case." Id. at 358. In Beecher, the Supreme Court affirmed this Circuit's holding that veil-piercing claims in a subsequent action require an independent jurisdictional basis.
Contrary to appellees' argument, Peacock does not hold that fraudulent conveyance claims brought in a subsequent action require an independent jurisdictional basis. In footnote 6 of the Peacock opinion, the Court refused to characterize the Thomas lawsuit as a fraudulent conveyance action. As the Court explained:
The United States, as amicus curiae for Thomas, suggests that the proceeding below was jurisdictionally indistinguishable from Swift & Co. Packers v. Compania Colombiana Del Caribe, S. A., 339 U.S. 684 (1950), Dewey v. West Fairmont Gas Coal Co., 123 U.S. 329 (1887), Labette County Comm'rs v. United States ex rel. Moulton, 112 U.S. 217 (1884), and Riggs v. Johnson County, 6 Wall 166 (1868) because it was intended merely as a supplemental bill to preserve and force payment of the ERISA judgment by voiding fraudulent transfers of Tru-Tech's assets. We decline to address this argument, because, even if Thomas could have sought to force payment by mandamus or to void postjudgment transfers, neither Thomas nor the courts below characterized this suit that way. Indeed, Thomas expressly rejects that characterization of his lawsuit. Brief for Respondent 4 ("This action... is not one to collect a judgment, but one to establish liability on the part of the Petitioner.").
Id. at 357 n.6 (internal citation omitted).
If the Peacock Court had intended to hold that claims to void fraudulent transfers required an independent basis for jurisdiction, that footnote, which left open that very issue, would have been unnecessary. In finding that Peacock specifically distinguished Thomas' case from an effort to void a post-judgment fraudulent conveyance we join the First and Ninth Circuits who have previously reached the same conclusion. See U.S.I. Props. Corp. v. M.D. Constr. Co., 230 F.3d 489, 499 (1st Cir. 2000)(noting that the Court specifically declined to address Thomas' claim as a fraudulent conveyance claim); Thomas, Head, & Greisen Employers Trust v. Buster, 95 F. 3d 1449, 1454 n.7 (9th Cir. 1996) (same).
Since Peacock, most courts have continued to draw a distinction between post-judgment proceedings to collect an existing judgment and proceedings, such as claims of alter ego liability and veil-piercing, that raise an independent controversy with a new party in an effort to shift liability. Where the post-judgment proceeding is an effort to collect a federal court judgment, the courts have permitted judgment creditors to pursue, under the ancillary enforcement jurisdiction of the court, the assets of the judgment debtor even though the assets are found in the hands of a third party. See Thomas, Head, 95 F.3d at 1454; see also Securities & Exchange Comm'n v. Antar, 120 F. Supp. 2d 431, 440 (D.N.J. 2000) (asserting jurisdiction over fraudulent conveyance claim, noting "the SEC's claim is exactly the sort of claim approved in Peacock it seeks to reach assets belonging to the judgment debtor but found in the hands of the relief defendants"); Merrell v. Miller, No. Civ. A-91-493-A, 1998 WL 329264, at *2 (E.D. Va. June 8, 1998) (citing Peacock and permitting fraudulent conveyance claim to proceed, noting "plaintiff does not allege that he should be able to satisfy his judgments by reaching Ms. Deal's assets or Ms. Locher's assets; rather, he alleges that the assets in question rightly belong to defendant Miller.").
In Thomas, Head, the Ninth Circuit, after a lengthy discussion of Peacock, held that a district court has enforcement jurisdiction over a judgment creditor's fraudulent conveyance claims against transferees who were not parties to the underlying action. The Court distinguished the plaintiffs' fraudulent conveyance claims from the veil-piercing claim at issue in Peacock:
Thomas, Head seeks only to disgorge from them, as alleged fraudulent transferees, the property Buster wrongfully transferred to them. Because Thomas, Head is not attempting to establish the Johnson parties' liability for the original judgment, we find Peacock inapposite.
95 F.3d at 1454.
Futura Development of Puerto Rico, Inc., v. Estado Libre Asociado de Puerto Rico, 144 F.3d 7, 11 n.2 (1st Cir. 1998) does not hold to the contrary. Futura involved an alter ego claim, not one for fraudulent conveyance. Moreover, it was decided before U.S.I. Properties, which was also an alter ego case, but clearly recognized in dicta the federal courts' enforcement jurisdiction over an action seeking to reach the assets of a judgment debtor in the hands of a third party. See 230 F.3d at 496.
In the present proceeding, Appellants seek only to void the allegedly fraudulent conveyances of HAESI to and among Richter, Hill, and Advantix, in order to ensure the collectibility of the default judgment against HAESI. Their fraudulent conveyance claims do not seek to hold Richter, Hill, or Advantix liable for the existing judgment against HAESI as alter egos of HAESI or to pierce the corporate veil of HAESI. Under Connecticut law, fraudulent conveyance actions operate as simple collection mechanisms; they do not present a substantive theory seeking to establish liability on the part of a new party not otherwise liable. Nothing in Connecticut statutory or common law would permit a party to impose liability for the underlying judgment on the transferee of a fraudulent conveyance or to reach the transferee's own assets. See Conn. Gen. Stat. Ann. §52-552h(b) (specified remedies under Uniform Fraudulent Transfer Act limited to avoidance of transfer, attachment, or injunctive relief); Connecticut Sav. Bank v. Obenauf, 758 A.2d 363, 365 (Conn. App. Ct. 2000) (claim of fraudulent conveyance "could not result in a judgment of liability against the transferee, joint and several or otherwise, on the underlying debt obligations owed by the transferor"). Accordingly, for the reasons discussed above, Appellants' claims for fraudulent conveyance were within the scope of the enforcement jurisdiction of the district court, and the district court erred in dismissing appellants' complaint for lack of subject matter jurisdiction.
B. Collateral Estoppel and Res Judicata
The appellees argue that appellants' claims are barred both by collateral estoppel (issue preclusion) and res judicata (claim preclusion). Collateral estoppel and res judicata are related but distinct doctrines that may bar a party from litigating certain issues or claims in a subsequent proceeding. Both are affirmative defenses. See Leather v. Eyck, 180 F.3d 420, 424 (2d Cir. 1999).
Collateral estoppel "applies when (1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was [a] full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits." United States v. Hussein, 178 F.3d 125, 129 (2d Cir. 1999) (internal quotation marks and citation omitted).
Accordingly, the question for us is whether or not the issue of ancillary enforcement jurisdiction was actually litigated or actually decided in the district court proceeding. From the record we cannot say that it was. It is clear that the appellants did not plead enforcement jurisdiction in their complaint or amended complaint; they asserted only diversity as the basis for the court's jurisdiction. Nothing in appellants' papers in opposition to the motion to dismiss raises the issue of the district court's enforcement jurisdiction. The lone reference to "supplemental jurisdiction," which appears in their motion for reconsideration, is ambiguous at best. Supplemental jurisdiction can be used to refer to many types of jurisdiction, including the pendent category of ancillary jurisdiction articulated in Peacock. Moreover, as the Peacock Court noted, when Congress codified much of the common law of ancillary jurisdiction as part of "supplemental jurisdiction" in 28 U.S.C. § 1367, it included the branch of ancillary jurisdiction premised on factual interdependence, but did not codify enforcement jurisdiction. See 28 U.S.C. § 1367. Accordingly, a reference to supplemental jurisdiction does not equate to a reference to enforcement jurisdiction.
Furthermore, because the motion was denied by summary order without opinion, we cannot determine whether the issue of the court's enforcement jurisdiction, even assuming it was presented, was decided in the first action. Because the issue of the district court's enforcement jurisdiction was not actually litigated and actually decided in the first action, plaintiffs are not barred by collateral estoppel from raising it in the second action.
Having decided that the issue of enforcement jurisdiction was not previously litigated or decided in the first action, we turn to appellees' alternate argument under res judicata. Under the traditional rule of res judicata,
a valid, final judgment, rendered on the merits, constitutes an absolute bar to a subsequent action between the same parties, or those in privity with them, upon the same claim or demand. It operates to bind the parties both as to issues actually litigated and determined in the first suit, and as to those grounds or issues which might have been, but were not, actually raised and decided in that action. The first judgment, when final and on the merits, thus puts an end to the whole cause of action.
Saylor v. Lindsley, 391 F.2d 965, 968 (2d Cir. 1968) (citations omitted).
We begin by noting that the district court's dismissal of the appellants' fraudulent conveyance claim for lack of diversity jurisdiction was not a final decision on the merits of that claim. See Fed. R. Civ. P. 41(b). Nonetheless, the appellees argue that because the appellants could have asserted enforcement jurisdiction in the first action, they are barred from asserting it in the second action. To find that appellants were required to assert all possible bases for jurisdiction in the first action or lose them, where there has been no final decision on the merits of the claim, would be unfair.
The policies underlying res judicata reflect the sensible goal that where possible all related claims be resolved in one proceeding. In the present case, in an effort to pursue a unified resolution of their related alter ego and fraudulent conveyance claims, the appellants asserted diversity jurisdiction -- the only basis for subject matter jurisdiction that would have effected that result. We endorse the important distinction between on the one hand failing to allege an available jurisdictional ground that would allow unified resolution of all claims, and on the other hand alleging a jurisdictional ground that would allow such unified resolution but which is rejected. See Restatement (Second) of Judgments § 26(1)(c) (1982) (preclusion unwarranted where "[t]he plaintiff was unable to rely on a certain theory of the case or to seek a certain remedy or form of relief in the first action because of... restrictions on [courts'] authority to entertain multiple theories or demands for multiple remedies or forms of relief in a single action"); 18 Wright, Miller and Cooper, Federal Practice and Procedure, § 4412, at 93 (1981) ("It is clear enough that a litigant should not be penalized for failing to seek unified disposition of matters that could not have been combined in a single proceeding, and even clearer that no penalty should be inflicted if a deliberate effort to combine such matters has been expressly rejected.") (emphasis added).
In short, we decline to adopt a rule that would prohibit litigants from pursuing some of their claims on a narrower jurisdictional basis after their attempt to allege a jurisdictional basis that would resolve all of their claims in one proceeding was rejected.
The authority upon which the appellees chiefly rely does not hold to the contrary. In both Shaver v. F.W. Woolworth Co., 840 F.2d 1361 (7th Cir. 1988), and Kale v. Combined Insurance Co. of America, 924 F.2d 1161 (1st Cir. 1991), the plaintiffs obtained final decisions on the merits of federal claims but failed to assert diversity jurisdiction for related state law claims, asserting instead that pendent jurisdiction was appropriate. After the court rejected the federal claims and declined pendent jurisdiction over the state claims, the plaintiffs filed the related claims in state court, the defendants removed on diversity grounds to federal court, and the court dismissed on res judicata grounds.
Had the plaintiffs in those cases pled diversity jurisdiction it would have provided a jurisdictional basis for all of their claims and permitted a unified resolution of those claims, whether based in federal or state law, in the federal court. In such cases, the efficiency concerns of res judicata are, unlike in this case, promoted by barring subsequent actions.
The remainder of the cases cited by appellees involve plaintiffs who sought to relitigate the precise jurisdictional issue decided in the prior proceeding, and are thus inapposite. In Zoriano Sanchez v. Carribean Carriers Ltd., 552 F.2d 70 (2d Cir. 1977) the District Court for the Southern District of New York had held that plaintiffs were precluded from asserting jurisdiction under the theory that Liberian law permitted the application of general maritime law where plaintiffs had previously brought the same cause of action in district court in Puerto Rico and that court had rejected general maritime jurisdiction. This Circuit affirmed, noting that "[t]he res judicata doctrine... not only binds the parties and their privies as to grounds or issues actually litigated, but also as to any other admissible matter which might have been offered for that purpose." Id. at 72. Since the plaintiffs could have argued that Liberian law supported their claim of general maritime jurisdiction but did not, res judicata applied. Unlike in this case, the plaintiffs in Zoriano Sanchez were not advancing a new theory of jurisdiction, but rather offering further support for a jurisdictional theory that had already been considered and rejected. See Ripperger v. A.C. Allyn & Co., 113 F.2d 332 (2d Cir. 1940) (plaintiff precluded from relitigating jurisdictional question based on subsequent change of law).
Because the appellants in this case neither failed in the first action to allege a jurisdictional ground that would have permitted a unified resolution of their claims nor seek in the second action to relitigate a jurisdictional issue that has been considered and rejected by the district court, they are not barred by the principles of res judicata from arguing that their fraudulent conveyance claims are within the Court's enforcement jurisdiction.
Conclusion
The district court's dismissal of the appellants' fraudulent conveyance action was in error. The judgement appealed from is vacated and the case is remanded for further proceedings consistent with this opinion.