Apparel Art v. Amerlex Enterprises, 48 F.3d 576, 1st Cir. (1995)
Apparel Art v. Amerlex Enterprises, 48 F.3d 576, 1st Cir. (1995)
3d 576
Freddie Perez-Gonzalez with whom Woods, Rosenbaum, Luckeroth & PerezGonzalez, San Juan, PR, was on brief, for appellant.
Eugene F. Hestres with whom Bird, Bird & Hestres, San Juan, PR, was on
brief, for appellees.
This matter is before the Court on appeal from a decision rendered by Judge
Juan M. Perez-Gimenez in the United States District Court for the District of
Puerto Rico. Applying Puerto Rico's res judicata doctrine, Judge PerezGimenez dismissed appellant Apparel Art International, Inc.'s ("Apparel")
claims of fraudulent conveyance, depletion of corporate assets, and alter ego as
contained in Apparel's Supplementary Pleadings in Aid of Execution of
Judgment. Those pleadings were filed in supplementary proceedings in which
Apparel sought to enforce an arbitration award rendered against Amertex
Enterprises Ltd. ("Amertex") by American Arbitration Association ("AAA")
arbitrators and confirmed by the district court.
I. BACKGROUND FACTS
A. The Parties
6
In 1985, Apparel entered into a subcontract with Amertex under which Apparel
was to manufacture certain components of "Chempro", a camouflage chemical
protective suit for military use. Amertex had entered into a contract (the "prime
contract") to supply Chempro suits to the United States Department of Defense.
This case began when Apparel initiated an arbitration proceeding claiming that
Amertex had breached the subcontract. A detailed review of the numerous
legal proceedings in this matter, beginning with the arbitration, is a necessary
prelude to our determination of the res judicata question at issue on appeal.
C. The Arbitration
9
lacked subject matter jurisdiction to hear those claims. Apparel did not seek
judicial review of that dismissal. On June 27, 1989, after nearly two years of
hearings, the arbitrators awarded $387,994.00 to Apparel. The arbitrators
further decided that the costs of arbitration were to be borne equally between
the parties.
D. Apparel I--The District Court Action Before Judge Perez-Gimenez
10
11
On September 26, 1989, Apparel filed this lawsuit, Civil Action No. 89-1272
(PG) (hereinafter "Apparel I"), against Amertex and the AAA as co-defendants
in the United States District Court for the District of Puerto Rico. The case was
assigned to Judge Perez-Gimenez. Apparel's complaint sought to set aside the
arbitration award under the procedures authorized by the Federal Arbitration
Act, 9 U.S.C. Secs. 10-11 (1988 & Supp. V 1993). Apparel alleged that the
arbitration process was arbitrary and the award was insufficient. Apparel
prayed that the court set aside the arbitration award and resubmit the merits of
the case for resolution by the court. In the alternative, Apparel prayed that the
court remand the case to the arbitrators so the award could be clarified.
12
Amertex moved to dismiss the complaint on the grounds that the action was
time-barred because Apparel failed to provide required notice. On March 26,
1990, Apparel voluntarily consented to the dismissal, without prejudice, of its
claim against the AAA. Apparel also moved to convert the suit against
Amertex to an action to enforce the arbitration award pursuant to the Federal
Arbitration Act, 9 U.S.C. Sec. 9 (1988). Judge Perez-Gimenez granted
Apparel's motion on April 10, 1990, and entered an order dismissing the action
as to the AAA, confirming the award against Amertex, and entering judgment
for Apparel in the amount of $384,994.00 plus interest, costs, and attorneys'
fees. The court subsequently, on the motion of Amertex, modified the judgment
to remove the imposition of court costs and attorneys' fees against Amertex.
13
After entering judgment on the arbitration award, the district judge permitted
Apparel to conduct post-judgment discovery in supplementary proceedings so
that Apparel could execute the judgment against Amertex. In January of 1991,
Apparel moved the court to compel production of documents and for sanctions.
Apparel alleged that it was investigating the transfer of assets from Amertex to
D.J., a company which Apparel suspected to have been created for the purpose
of defrauding Amertex's creditors. Amertex opposed the motion on the grounds
that Apparel's discovery request was onerous. On January 8, 1991, Apparel
moved for execution of the judgment against Amertex because Amertex had
not paid the judgment. Apparel requested the court to execute the judgment via
attachment or garnishment against a balance owed by D.J. to Amertex. In its
opposition to this motion, Amertex argued that D.J. was not a party to the
action and Apparel had not filed notice of the motion with D.J., and requested a
show cause hearing to determine whether D.J. should be subject to an order to
execute the judgment. On January 10, 1991, Amertex also requested that the
court issue a protective order insulating Amertex from further discovery
requests. On January 24, 1991, the district court denied Amertex's request for a
protective order, ordered the execution of the judgment, and ordered
attachments and garnishments to be served on Amertex's debtors--including a
writ of attachment ordering D.J. to pay to Apparel any sums that D.J. owed to
Amertex.
14
18
Apparel then appealed Judge Fuste's dismissal to this Court. A panel of this
Court affirmed Judge Fuste's dismissal of the action, but did not base its
decision on res judicata principles. Apparel Art Int'l, Inc. v. Jacobson, 967 F.2d
720, 722 (1st Cir.1992). Rather, it was held that Apparel's allegations failed to
establish a pattern of illegal conduct sufficient to support a claim under RICO.
Id. at 724.
learned that Amertex had concealed and diverted its assets in concert with coappellee D.J. and had thus impeded execution of the judgment. Therefore,
Apparel initiated post-judgment supplementary proceedings in an effort to
satisfy the judgment. Accordingly, also on October 29, Apparel filed
Supplementary Pleadings in Aid of Execution of Judgment. The supplementary
pleadings named Amertex, D.J., Leo Jacobson, Harriet Jacobson, and Diego
Jacobson as co-defendants involved in Amertex's effort to avoid paying the
judgment. Apparel alleged the following unlawful conduct: 1) Amertex's
corporate assets had been depleted; 2) Amertex's assets were fraudulently
conveyed to co-appellee D.J.; and 3) Amertex and D.J. were alter egos of their
presidents, Leo Jacobson and Diego Jacobson, respectively.5 Apparel sought
only two remedies. First, Apparel sought to execute the judgment against the
assets that were fraudulently conveyed from Amertex to D.J. Second, Apparel
prayed that on its depletion of corporate assets and alter ego claims, all codefendants be held jointly and severally liable for the judgment. The codefendants did not oppose Apparel's attempt to file a supplementary pleading,
and on November 11, 1992, the district court granted Apparel's motion to
supplement its allegations as part of the supplementary proceeding in aid of
execution of judgment. On January 29, 1993, the district court ordered D.J. to
appear at a show cause hearing and demonstrate why the asset transfers from
Amertex were not illegal and should not be rendered null and void so that
Apparel could execute the judgment directly against the transferred assets. The
order also directed Apparel to offer proof of its alter ego allegations sufficient
to show that liability could be imposed against the co-defendants.
21
On April 12, 1993, co-appellees D.J. and Diego Jacobson filed a Motion to
Dismiss, or in the Alternative for Summary Judgment on the grounds that, due
to Judge Fuste's order dismissing Apparel's claims in Apparel II, res judicata
barred litigation of Apparel's claims in the supplementary proceedings. D.J. and
Diego Jacobson further argued that the supplementary pleadings were
procedurally defective under Fed.R.Civ.P. 69. The motion was opposed by
Apparel. On August 3, 1993, Judge Perez-Gimenez granted the motion to
dismiss after concluding that Apparel's claims were precluded under Puerto
Rico's res judicata doctrine. He reasoned that the underlying purpose of
Apparel's claims in the supplementary proceedings was to raise claims of
fraudulent conduct that had been previously dismissed by Judge Fuste in
Apparel II and affirmed by this Court. Judge Perez-Gimenez reasoned that
there was no difference between the persons or claims in the enforcement
action and those in Apparel II, and, thus, concluded that Apparel had merely
reworked its legal theories in an effort to secure a more favorable judgment.
22
On August 13, 1993, Apparel moved the court to amend and reconsider its
After carefully considering the record, the parties' briefs, and the parties' oral
arguments, this Court holds that res judicata does not bar Apparel's claims as
contained in the supplementary pleadings. Therefore, we reverse the dismissal
entered by the court below and remand the case for further proceedings.
II. DISCUSSION
24
The decision appealed from is that res judicata barred relitigation of the claims
as contained in Apparel's Supplementary Pleadings in Aid of Execution of
Judgment. Judge Perez-Gimenez reasoned that, under Puerto Rico's version of
the res judicata doctrine, there was no difference between the claims raised in
Apparel's supplementary pleadings and those dismissed by Judge Fuste in
Apparel II--a dismissal that was affirmed by this Court of Appeals. We review
de novo the district court's dismissal of Apparel's claims as contained in the
supplementary pleadings. See Kale v. Combined Ins. Co. of America, 924 F.2d
1161, 1165 (1st Cir.1991), cert. denied, 502 U.S. 816, 112 S.Ct. 69, 116
L.Ed.2d 44 (1991) (Court of Appeals ordinarily reviews trial courts' rulings on
motions to dismiss de novo ).
25
26
27
Plainly, the district court was mistaken when it applied Puerto Rico's preclusion
27
Plainly, the district court was mistaken when it applied Puerto Rico's preclusion
law in dismissing Apparel's supplementary pleadings. Federal law principles of
res judicata govern the preclusive effect of a prior federal court's judgment on a
subsequent action brought in federal court. In re El San Juan Hotel Corp., 841
F.2d 6, 9 (1st Cir.1988).7 In this case, the Court must analyze the preclusive
effects of the prior judgments rendered by the district court in Apparel I and
Apparel II to determine whether they bar litigation of Apparel's supplementary
pleadings. Because both of these earlier judgments were rendered by a federal
court, the preclusive effect of those judgments in this federal case is governed
by federal res judicata principles.8 Accordingly, federal principles of res
judicata, not those of the Commonwealth of Puerto Rico, are controlling here
with respect to this Court's de novo review of the district court's dismissal of
Apparel's supplementary pleadings.
28
Under the federal law of res judicata, 9 a final judgment on the merits of an
action precludes the parties or their privies from relitigating claims that were
raised or could have been raised in that action. Allen v. McCurry, 449 U.S. 90,
94, 101 S.Ct. 411, 414-15, 66 L.Ed.2d 308 (1980); Gonzalez v. Banco Cent.
Corp., 27 F.3d 751, 755 (1st Cir.1994). The policy rationale behind res judicata
is to "relieve parties of the cost and vexation of multiple lawsuits, conserve
judicial resources, and, by preventing inconsistent decisions, encourage reliance
on adjudication." Allen, 449 U.S. at 94, 101 S.Ct. at 415. Res judicata,
therefore, prevents plaintiffs from splitting their claims by providing a strong
incentive for them to plead all factually related allegations and attendant legal
theories for recovery the first time they bring suit. See Kale, 924 F.2d at 1166.
29
This Court has articulated a three-part test to determine whether res judicata
precludes litigation of a party's claims. For a claim to be precluded, the
following elements must be present: 1) a final judgment on the merits in an
earlier suit; 2) sufficient identicality between the causes of action asserted in the
earlier and later suits; and 3) sufficient identicality between the parties in the
two suits. Gonzalez, 27 F.3d at 755; Kale, 924 F.2d at 1165. In this case, the
Court need not entertain detailed analysis of the first and third elements of this
test. Our examination of the second element of the test clearly establishes that
res judicata is inapplicable to Apparel's claims.
30
Only where two separate suits involve sufficiently identical causes of action
does a judgment in an earlier action preclude litigation of claims in a
subsequent action. See Gonzalez, 27 F.3d at 755; Kale, 924 F.2d at 1165. The
focal inquiry in assessing the applicability of res judicata, therefore, is whether
the causes of action raised in separate lawsuits are indeed the same. This Court
has adopted the methodology of the Restatement (Second) of Judgments in
defining the cause of action for res judicata purposes. Manego v. Orleans Bd.
of Trade, 773 F.2d 1, 5 (1st Cir.1985), cert. denied, 475 U.S. 1084, 106 S.Ct.
1466, 89 L.Ed.2d 722 (1986). Accordingly, we follow a transactional approach
to determine the identity of the underlying claims or causes of action. See
Gonzalez, 27 F.3d at 755; Kale, 924 F.2d at 1166; Manego, 773 F.2d at 5.
Under this approach, a cause of action is defined as a set of facts which can be
characterized as a single transaction or a series of related transactions. The
cause of action, therefore, is a transaction that is identified by a common
nucleus of operative facts. Although a set of facts may give rise to multiple
counts based on different legal theories, if the facts form a common nucleus
that is identifiable as a transaction or series of related transactions, then those
facts represent one cause of action. See, e.g., Gonzalez, 27 F.3d at 755; Kale,
924 F.2d at 1166. This Court must determine, therefore, whether the facts that
underlie Apparel's claims as contained in its supplementary pleadings arise
from the same nucleus of operative facts as those that were adjudicated by the
prior judgments of the district court.10 Only if the actions' factual bases are the
same will Apparel's claims be barred by res judicata. If Apparel's claims as
advanced in the supplementary proceedings are separate and distinct from those
litigated in Apparel I and Apparel II, that is, if they rest on a different factual
basis, then res judicata does not preclude litigation of Apparel's claims. See
Landrigan v. City of Warwick, 628 F.2d 736, 741 (1st Cir.1980).
31
This Court has enumerated several factors which are useful in determining
whether a party has advanced claims in multiple litigations which derive from
the same nucleus of operative facts. See Gonzalez, 27 F.3d at 756. These
factors include: 1) whether the facts are related in time, space, origin or
motivation; 2) whether the facts form a convenient trial unit; and 3) whether
treating the facts as a unit conforms to the parties' expectations. Id.
Additionally, when defining the contours of the common nucleus of operative
facts, it is often helpful to consider the nature of the injury for which the litigant
seeks to recover. See id. With these considerations in mind, this Court now
examines Apparel's claims in the supplementary pleadings, Apparel I, and
Apparel II to determine whether they are rooted in the same nucleus of
operative facts.
32
assets; 2) that Amertex made fraudulent conveyances; and 3) that Amertex and
D.J. are alter egos of their respective presidents, Leo and Diego Jacobson. The
remedies that Apparel seeks further illustrate the factual bases of its claims. For
the alleged fraudulent conveyances, Apparel seeks to execute the judgment in
Apparel I directly against those assets that were transferred to D.J. With respect
to the depletion of corporate assets and alter ego allegations, Apparel seeks to
make all the co-defendants jointly and severally liable on the judgment. It is
obvious on the face of the supplementary pleadings that Apparel's cause of
action in the supplementary proceedings is the alleged effort by Amertex and
the other co-defendants, including co-appellees, to defraud Apparel through
measures taken to prevent Apparel from collecting on its judgment. Apparel's
supplementary pleadings seek only to satisfy the judgment. They do not raise
any new legal theories on which Apparel seeks to recover additional damages.
Apparel's supplementary pleadings can only be precluded by res judicata if the
same cause of action, i.e. the co-defendants' fraudulent efforts to avoid
execution of the judgment against Amertex, was previously litigated to a
judgment on the merits in either Apparel I or Apparel II. Upon analysis of the
causes of action litigated in Apparel I and Apparel II, it is clear that the cause
of action raised in Apparel's supplementary pleading has never before been
litigated on the merits and simply represents Apparel's effort to enforce the
judgment already entered by the district court in Apparel I.
33
In Apparel I, the district court confirmed the award rendered by the AAA
arbitrators and entered judgment for Apparel in the amount of $387,994.00. An
arbitration award generally has res judicata effect as to all claims heard by the
arbitrators. See Pujol v. Shearson/American Express, Inc., 829 F.2d 1201,
1206-07 (1st Cir.1987); 18 Charles A. Wright et al., Federal Practice and
Procedure Sec. 4475 (1981). A judgment by a federal court confirming an
arbitration award under the Federal Arbitration Act has "the same force and
effect, in all respects, as, and [is] subject to all the provisions of law relating to,
a judgment in an action...." 9 U.S.C. Sec. 13 (1988). Therefore, when a federal
district court enters a judgment confirming an arbitration award pursuant to the
Federal Arbitration Act, that judgment has res judicata effect as to all matters
adjudicated by the arbitrators and embodied in their award. See 6 C.J.S.
Arbitration Sec. 148 (1975). Accordingly, to assess whether the district court's
judgment in Apparel I precludes litigation of Apparel's supplementary
pleadings, this Court must determine whether Apparel's claims in arbitration
arose from the same nucleus of operative facts as those raised by its allegations
in the supplementary pleadings.
34
The claims that Apparel raised before the AAA arbitrators arose from a
common nucleus of operative facts relating to Amertex's misconduct while
entering into and performing under the subcontract.11 This was Apparel's cause
of action and it formed the basis for the claims adjudicated by the arbitrators
and the district court's judgment confirming the arbitrators' award. For the
purposes of our res judicata analysis, this cause of action is clearly distinct from
that raised by Apparel's supplementary pleadings. None of the factual
circumstances giving rise to Apparel's claims of depletion of corporate assets,
fraudulent conveyance, or alter ego was ever raised before the arbitrators.
Therefore, the district court's judgment in Apparel I does not, under res judicata
principles, preclude litigation of Apparel's claims as contained in the
supplementary pleadings.
35
Finally, the Court must consider whether the judgment rendered by Judge Fuste
in Apparel II precludes the litigation of Apparel's supplementary pleadings.
Apparel's claims as contained in its Amended Complaint were based on two
separate sets of facts and thus raised two separate causes of action. The first set
of facts gave rise to Apparel's claim that Amertex violated RICO and included
allegations that Amertex bribed government officials while securing the prime
contract and also committed mail and wire fraud both in inducing Apparel to
enter into the subcontract and through Amertex's subsequent breaches of the
subcontract. These claims closely parallel the RICO claims raised by Apparel
in arbitration and dismissed by the AAA arbitrators for lack of subject matter
jurisdiction. As in Apparel I, the cause of action defined by this common
nucleus of operative facts is clearly distinct from that raised by Apparel in its
supplementary pleadings.12 It does not pertain to the actions taken by Amertex
and the other co-defendants to obstruct Apparel's efforts to collect on the
judgment.
36
The second set of facts alleged by Apparel in Apparel II formed the basis for
essentially the same claims of fraudulent conveyance, depletion of assets, and
alter ego that Apparel raised in its supplementary pleadings. In Apparel II,
Apparel alleged that while the arbitration was pending, Amertex, along with
co-appellees and the other co-defendants, engaged in transactions intended to
defraud Amertex's creditors, including Apparel. Accordingly, Apparel's
Amended Complaint in Apparel II prayed that Leo and Harriet Jacobson, along
with Diego Jacobson and D.J., be held jointly and severally liable to Apparel
for the amount of the judgment on the arbitration award, plus interest.
37
court in an earlier action expressly reserves the litigant's right to bring those
claims in a later action. Kale, 924 F.2d at 1167; Restatement (Second) of
Judgments Sec. 26(1)(b) (1982). In Judge Fuste's opinion dismissing Apparel's
Amended Complaint in Apparel II, he noted that:
38
Essentially,
the fraudulent transfer claim is merely one aspect of plaintiff's attempt
at collection of the judgment issued [in Apparel I]. Since plaintiff has already begun
that process in the case before Judge Perez- Gimenez, we cannot entertain these
claims again here without a real risk of allowing multiple judgments to issue for the
same harm.... The dismissal is without prejudice to any legitimate execution of
judgment motions which plaintiff may seek to file before Judge Perez-Gimenez [in
the supplementary proceedings].
39
Apparel Art Int'l v. Jacobson, Civil No. 90-1756 (JAF) at 6-7 (D.P.R. Aug. 21,
1991).
40
III. CONCLUSION
41
42
43
Among the conduct that Apparel alleged to violate RICO was: Amertex's
fraudulent inducement of Apparel to enter into the subcontract; bribery of
government officials in order to secure the prime contract; and mail and wire
fraud in the submission of false information to the government
These are substantially the same allegations as those made before Judge Fuste
in Apparel II and dismissed by the court without prejudice to the consideration
of them in the enforcement action before Judge Perez- Gimenez
Puerto Rico's res judicata doctrine is codified in P.R.Laws Ann. tit. 31, Sec.
3343 (1991). This is a general provision of Puerto Rico's law of civil procedure
which is not specifically applicable to supplementary proceedings in aid of
execution of a judgment
This Court has held that where a federal court has subject matter jurisdiction
under diversity, federal law governs the preclusive effect of prior federal court
judgments. Johnson v. SCA Disposal Servs., Inc., 931 F.2d 970, 974 (1st
Cir.1991). Similarly, federal law governs the res judicata effects of a federal
court judgment in a prior federal question case on a subsequent case that
presents a federal question to a federal court. See Blonder-Tongue Lab., Inc. v.
University of Ill. Found., 402 U.S. 313, 324 n. 12, 91 S.Ct. 1434, 1440 n. 12, 28
L.Ed.2d 788 (1971); Gonzalez v. Banco Cent. Corp., 27 F.3d 751, 755 (1st
Cir.1994). The policy underlying the application of federal res judicata
principles is that the federal courts must have the power to define the effect of
their own judgments. See Johnson, 931 F.2d at 974 (quoting Kern v. Hettinger,
303 F.2d 333, 340 (2d Cir.1962))
Although the district court's judgment in Apparel I simply confirmed the award
rendered by the AAA arbitrators, under the Federal Arbitration Act such a
judgment has the same effect as a judgment in an action. 9 U.S.C. Sec. 13
10
11
12
This Court noted the distinction between the two sets of facts in another context
in the decision in Jacobson, where it was observed that the fraudulent
conveyance "was not part of the conduct aimed at securing the contract ... the
[fraudulent conveyance was] too un related--too separate, too distinct, too
obviously related to a simple effort to avoid a later court judgment--to permit a
finding that, taken together with the earlier acts, it is part of a racketeering
'pattern.' " 967 F.2d at 724