Mildred A. McLearn v. Cowen & Co. And Merrill Lynch Pierce Fenner & Smith, Incorporated

660 F.2d 845, 32 Fed. R. Serv. 2d 833, 1981 U.S. App. LEXIS 17311

• Court: Court of Appeals for the Second Circuit
• Decided: September 28, 1981
• Docket: 1465, Docket 81-7146
• Status: Published

Opinions

LUMBARD, Circuit Judge:

The plaintiff, Mildred A. McLearn, appeals from a 1980 order of the Southern District of New York that denied her motion under Fed.R.Civ.P. 60(a) to clarify a 1976 judgment dismissing her complaint. Plaintiff sought clarification that the dismissal of her cause of action under state law was not on the merits so that she would be free to pursue that claim under state law in the New York state courts. The district court denied plaintiff’s motion, finding no omission subject to relief under Rule 60(a) and, alternatively, that the plaintiff’s state law claim had been properly dismissed on the merits.

I believe that nothing done in the district court by the parties or the court justified the district court in exercising jurisdiction over the state law claim with respect to taking any action on the merits of the state law claim. Although the record is ambiguous as to what the 1976 district court order meant to do regarding the merits of the state claim, I am convinced that the district court had no power to make any order about the merits of the state claim. Consequently, I would reverse and remand with directions to amend the order of dismissal to provide that it is without prejudice to the merits of any claim under state law. As Judge Lasker concurs in this result, we so order.

I.

The complaint filed in the Southern District in 1975 followed the pattern of the many complaints filed in that district in recent years against brokers and investment bankers. It sought damages from the plaintiff’s investment adviser and broker, Merrill Lynch Pierce Fenner & Smith, Inc., under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. The allegations of the third cause of action set forth a customer-broker relationship, reliance by the plaintiff on the judgment and integrity of Merrill Lynch’s officials in handling her account, and that those officials acted in an unprofessional, negligent and illegal manner and in “breach of the common law standards of fiduciary responsibility.” Thus, to the claims under federal law was added a common law claim the merits of which is governed by the law of New York. This cause of action was pendent to the federal claims. Although all three causes of action were alleged to arise from the same operative facts — namely, the handling of plaintiff’s account by Merrill Lynch — it is well settled that the state law claim could be heard in the federal courts only if some cause of action in the complaint showed a basis for federal jurisdiction.

In 1975, the defendants moved to dismiss the complaint for failure to plead fraud with particularity as required by Fed.R. Civ.P. 9(b). The court granted the motion with leave to amend. After plaintiff amended her complaint, defendants again moved to dismiss. In an order dated January 12, 1976, the court dismissed McLearn’s complaint with prejudice. No testimony was taken; no trial was held. The order read, in pertinent part:

The complaint still fails to set forth the facts and circumstances of the alleged fraud and must be dismissed.

This court affirmed that order without opinion on May 27, 1976.

Neither Judge Metzner’s memorandum opinion, or the order of dismissal, referred specifically to the state cause of action.¹ Undoubtedly, at this point, or even after we had affirmed the dismissal, counsel should have applied to the district court to amend its order to deal specifically with the survival of the state cause of action.

Thereafter, Mildred McLearn filed suit in the Westchester County Supreme Court against Merrill Lynch alleging the common law cause of action of breach of fiduciary duty. The Supreme Court denied a motion to dismiss on the ground of res judicata. The Appellate Division reversed, holding that the complaint should have been dismissed on res judicata grounds. 64 A.D.2d 606, 406 N.Y.S.2d 538 (1978). The Court of Appeals affirmed the dismissal, with three judges dissenting, 48 N.Y.2d 696, 422 N.Y. S.2d 60, 397 N.E.2d 750 (1979). The majority’s per curiam opinion held that the district court’s dismissal was on the merits for failure to state a cause of action, relying on Rule 41(b) Fed.R.Civ.P., which provides that a dismissal is on the merits unless the contrary expressly appears. 48 N.Y.2d at 699, 422 N.Y.S.2d 60, 397 N.E.2d 750. In dissent, Chief Judge Cooke argued that the federal court would not exercise jurisdiction where the federal claims are dismissed prior to trial, citing Second Circuit decisions. See, e. g., CES Publishing Corp. v. St. Regis Publications, Inc., 531 F.2d 11 (2d Cir. 1975); Nolan v. Meyer, 520 F.2d 1276 (2d Cir.), cert. denied, 423 U.S. 1034, 96 S.Ct. 567, 46 L.Ed.2d 408 (1975); Kavit v. A. L. Stamm & Co., 491 F.2d 1176 (2d Cir. 1974); Iroquois Industries v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970). Judge Meyer in his dissent went further and wrote that “as a matter of Federal law the State claims could not have been dismissed on the merits by the Federal court” where the dismissal of the federal claims was in advance of trial because the federal court was left without subject matter jurisdiction of the State claim. Consequently, the federal dismissal was not res judicata.

The plaintiff then moved the Court of Appeals for reargument, which the court denied on January 20,1981, in the following brief order: Motion for waiver of thirty day time limit and for reargument denied, without prejudice to renewal in the event the Federal District Court amends its order to show it declined to exercise pendent jurisdiction over the state court action, with $20 costs and necessary reproduction disbursements to respondent.

52 N.Y.2d 896, 437 N.Y.S.2d 306, 418 N.E.2d 1325.

After the Court of Appeals order, the plaintiff moved in the federal district court for relief under Fed.R.Civ.P. 60(a).

II.

First, I note that we are not precluded by the principle of collateral estoppel from deciding whether the district court had pendent jurisdiction over plaintiff’s state law claim. The general rule is that federal courts must give decisions of a state court the same preclusive effect that the highest court of the state would. Wright v. Georgia R.R. & Banking Co., 216 U.S. 420, 429, 30 S.Ct. 242, 245, 54 L.Ed. 544 (1910). If the New York Court of Appeals had decided that the federal district court had pendent jurisdiction to dismiss McLearn’s state law claim on the merits, then in this case the parties would be bound by that decision. See Angel v. Bullington, 330 U.S. 183, 187-88, 67 S.Ct. 657, 659-660, 91 L.Ed. 832 (1947). Arguably, the Court of Appeals decided that issue in holding that it must give res judicata effect to the district court order. However, the Court of Appeals’ order of January 20, 1981, expressly invited the federal court “to show it declined to exercise jurisdiction over the state court action. . .. ” This invitation to the federal court to decide an issue previously litigated in the New York courts indicates that the Court of Appeals itself does not give preclusive effect to its 1979 opinion. Accordingly, we are free to address the issue of the district court’s pendent jurisdiction over the plaintiff’s state claim.

Second, I think it clear that the district court lacked jurisdiction to dispose of the pendent state claim on the merits once it dismissed the federal claims prior to trial. The recognition of pendent jurisdiction depends entirely on the practical consideration of avoiding a retrial of factual issues that are necessarily involved in a trial of the same operative facts. See United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Where there has been a trial of the operative facts underlying both federal and state claims, a decent regard for economical and sensible use of the state and federal judicial machinery and considerations of expense to the litigants require that judgment after trial of state causes of action in a federal court be accorded res judicata effect in the state courts. Consequently, unless a trial of the operative facts is necessary to resolve claims that the federal court must hear, the federal court has no jurisdiction to take any action with respect to a pendent state law claim.² See Nolan v. Meyer, supra, 520 F.2d at 1280. Because no such trial was held here, the state claims were not pendent, not subject to federal jurisdiction, and any order dismissing them on the merits was void for lack of jurisdiction.

The proper route by which plaintiff should have sought relief from the 1976 dismissal would have been a motion under Fed.R.Civ.P. 60(b)(4) to vacate the judgment for lack of jurisdiction.³ Such a motion may be brought at any time after final judgment. See Crosby v. Bradstreet Co., 312 F.2d 483 (2d Cir. 1963), cert. denied, 373 U.S. 911, 83 S.Ct. 1300, 10 L.Ed.2d 412. However, plaintiff’s failure to bring her motion under Rule 60(b)(4) is not fatal. It is well settled that a court may raise the issue of subject matter jurisdiction at any time, sua sponte. E. g., Clerk v. Paul Gray, Inc., 306 U.S. 583, 59 S.Ct. 744, 83 L.Ed. 1001 (1939); see United States v. Burmah Oil Co. Ltd., 558 F.2d 43, 46 (2d Cir.), cert. denied, 434 U.S. 967, 98 S.Ct. 511, 54 L.Ed.2d 454 (1977). Moreover, “[although the rule requires a motion for relief from the judgment, it has been held that the court on its own motion may set aside a void judgment provided notice has been given of its contemplated action and the party adversely affected has been given an opportunity to be heard.” 11 C. Wright & A. Miller, Federal Practice and Procedure: Civil § 2862, at 198 (1973) (citing United States v. Milana, 148 F.Supp. 152 (D.Mich. 1957)). Here, defendants well understood that the thrust of plaintiff’s motion was to vacate the 1976 order, even though plaintiff’s counsel had labelled the motion one to correct a clerical error under Rule 60(a).⁴ The failure of plaintiff’s counsel to refer to the proper rule number does not prevent us from granting the relief that plaintiff in substance asked for, especially where defendants had notice of and argued against that relief. Hence, we may grant such relief on our own motion. However, because of the ambiguity in the district court’s order, we reverse and remand with directions to amend the order of dismissal to provide that the state law claim is dismissed for lack of jurisdiction.

1 . Although Judge Metzner’s order dismissing the amended complaint did not refer to the state cause of action, the order dismissing the original complaint referred specifically to the allegations of “fraud based on breach of fiduciary duty.”

2 . A federal court may exercise pendent jurisdiction in disposing of a state claim prior to trial where it has invested “substantial time and energy” on the state law issues prior to dismissal, Gray v. American International Association of Heat & Frost Insulators, 447 F.2d 1118, 1120 (6th Cir. 1971), or where “the state claim is so closely tied to questions of federal policy that the argument for exercise of pendent jurisdiction is particularly strong,” Gibbs, supra, 383 U.S. at 727, 86 S.Ct. at 1139. Neither exception applies here.

3 . I agree with Judge Meskill that Fed.R.Civ.P. 60(a) does not entitle plaintiff to the relief that she seeks.

4 . As defendants said in their brief, “what plaintiff was really attempting to do on her most recent application in the District Court was not to obtain ‘clarification’ of that Court’s intent, but to reargue the 1976 dismissal of her amended complaint in an effort to avoid the effect of the dismissal of her common law claims on the merits.” Such avoidance is precisely the relief to which we believe plaintiff is entitled. Defendants’ argument against this relief demonstrates that they had notice that the issue whether to vacate the 1976 order with respect to the state law claim was before this court.