Opinion
03 Civ. 9650 (RMB).
July 20, 2006
DECISION AND ORDER
I. Introduction
On or about February 24, 2005, Celeste Trust Reg. ("Celeste"), Esquire Trade Finance, Inc. ("Esquire"), and Investcor, LLC ("Investcor") (collectively, "Plaintiffs") filed a second amended complaint against CBQ, Inc. ("CBQ"), Networkland, Inc. ("Networkland"), and Technet Computer Services, Inc. ("Technet") (collectively, "Defendants") alleging that Defendants failed to release a promissory note and shares of stock held in an escrow account pursuant to an escrow agreement, dated March 27, 2001 ("Escrow Agreement"), "[d]espite timely demand by the Plaintiffs." (See Second Amended Complaint, dated February 24, 2005 ("Amended Complaint"), at 1.) CBQ responds that a settlement agreement, dated April 8, 2003 ("Settlement Agreement"), between Plaintiffs and Socrates Technologies, Inc. ("Socrates"), in a separate litigation precludes this action. (See Memorandum of Law in Support of Defendant CBQ's Motion For Summary Judgment, dated September 14, 2005 ("Def. Mem.") at 2.)
On December 4, 2004, Plaintiffs filed this action seeking "equitable relief in the form of an order requiring [CBQ] to reissue the shares and note [held in escrow] in the names of Plaintiffs and for money damages for the value of the shares and the note principal and accrued interest." (Amended Complaint at 2.)
Networkland and Technet have not appeared before the Court in this action.
On or about September 14, 2005, CBQ moved for summary judgment, arguing that this action is barred by res judicata because the Settlement Agreement "finally and fully released Socrates (and as demonstrated below, its privies, i.e., CBQ) from any present and future claims stemming from the facts alleged in a prior action litigated in this Court." (See Memorandum of Law in Support of Defendant CBQ's Motion For Summary Judgment, dated September 14, 2005 ("Def. Mem.") at 2.) On or about September 26, 2005, Plaintiffs cross-moved for summary judgment and opposed CBQ's motion, arguing that CBQ has breached the Escrow Agreement and that "CBQ has failed to prove the three points necessary to assert the affirmative defense of res judicata." (See Memorandum in Support of Plaintiffs' Cross-Motion for Summary Judgment and Opposition to Defendant CBQ's Motion For Summary Judgment, dated September 26, 2005 ("Pl. Mem."), at 4, 14.) CBQ filed a reply on or about September 30, 2005. (See Defendant CBQ's Reply Brief in Further Support of its Motion for Summary Judgment and in Opposition to Plaintiffs' Cross-Motion for Summary Judgment, dated September 30, 2005 ("Def. Reply").) Plaintiffs filed a sur-reply on or about October 14, 2005. (See Reply Memorandum in Further Support of Plaintiffs' Cross-Motion for Summary Judgment and Opposition to Defendant CBQ's Motion For Summary Judgment, dated October 14, 2005 ("Pl. Reply").) The parties waived oral argument. (See Letter from Eliezer Drew to the Court, dated October 14, 2005.)
For the reasons set forth below, Defendant CBQ's motion for summary judgment is granted, and Plaintiffs' cross-motion is denied.
II. Background
On or about March 27, 2000, Plaintiffs and several non-parties (collectively, the "Debenture Holders") purchased approximately $3.5 million worth of debentures from Socrates. (See Defendant CBQ Inc.'s Rule 56.1 Statement, dated September 14, 2005 ("Def. 56.1 Stmt."), ¶ 2.) On March 19, 2001, the Debenture Holders filed a civil action against Socrates and its officers and directors, styled as Celeste Trust Reg., et al. v. Socrates Technologies Corporation, et al., No. 01-cv-2296 (the "Socrates Action"), in the United States District Court for the Southern District of New York (Cedarbaum, J.) seeking approximately $3.5 million for alleged breaches of debenturerelated agreements and for securities fraud. (See Complaint, dated March 19, 2001 ("Socrates Action Complaint"), at 2-3; Def. 56.1 Stmt. ¶ 3.)
Approximately one week after the Socrates Action was filed, Socrates sought to sell the assets of its wholly-owned subsidiaries, Technet and Networkland, to CBQ in exchange for a $700,000 promissory note executed by CBQ in favor of Socrates and 7,650,000 shares of CBQ common stock (the "Collateral"). (See Asset Purchase Agreement, dated March 27, 2001, attached to Amended Complaint as Exhibit A ("Asset Purchase Agreement"), at 1.) Socrates sought the Debenture Holders' consent for this transaction and agreed to grant the Debenture Holders a security interest in the Collateral. (See Def. 56.1 Stmt. ¶ 5; Plaintiffs' Rule 56.1 Statement, dated September 26, 2005 ("Pl. 56.1 Stmt."), ¶ 5.) The Debenture Holders, including Plaintiffs, consented to this arrangement and, on or about March 27, 2001, the asset sale was consummated (the "Asset Sale"). (See Def. 56.1 Stmt. ¶ 6; Pl. 56.1 Stmt. ¶ 6; Asset Purchase Agreement at 1 ("Subject to the terms and upon satisfaction of the conditions contained in this Agreement, at the Closing, [Socrates, Technet, and Networkland] shall sell, convey, transfer assign and deliver to CBQ the Assets, and [CBQ] shall purchase, acquire and accept from [Socrates, Technet, and Networkland], the Assets, free and clear of all Liens . . . and [CBQ] shall assume and becomes responsible for [accounts payable].").)
The term "Assets" includes "all of the right, title and interest of [Technet and Networkland] in and to all of their assets, properties and rights, both tangible and intangible of every kind, nature and description whatsoever . . . and goodwill, claims and causes of action arising in connection with the Assets after the Closing Date. . . ." (See Asset Purchase Agreement at 2.)
As part of the closing of the Asset Sale, Socrates and the Debenture Holders executed a pledge agreement on March 27, 2001 (the "Pledge Agreement"), along with the Escrow Agreement (the Escrow Agreement together with the Pledge Agreement are referred to as the "Collateral Agreements"), and transferred the Collateral to an escrow agent. (Def. 56.1 Stmt. ¶¶ 8, 10.) The Collateral Agreements allowed for the release of the Collateral if: (1) "Socrates breached its obligations to the Debenture Holders" and (2) CBQ received "an opinion of counsel reasonably satisfactory to CBQ that such distribution of the Collateral to the Debenture Holders is in compliance with state and federal securities laws." (Def. 56.1 Stmt. ¶¶ 12, 13; Pl. 56.1 Stmt. ¶¶ 12, 13.)
On July 20, 2001, Plaintiffs wrote to CBQ "stating that no interest payments [on the debentures] had been received and declaring [CBQ] in default" under the Collateral Agreements. (Amended Complaint ¶ 26.) In August 2001, the Debenture Holders made a demand for the release of the Collateral. (See Letter from Celeste Trust to Barbara Mittman, attached to Amended Complaint as Exhibit G, at 1.)
On or about April 8, 2003, the Debenture Holders, including Plaintiffs, and Socrates' officers and directors executed the Settlement Agreement, which "releases and discharges" the officers, directors, and "Socrates Technologies Corporation, their predecessors and successors in interest and each past or present parent, subsidiary, related or otherwise affiliated entity, principal, director, officer, employee, agent and any representative, assignee, beneficiary, heir, executor or administrator of any of them" from "all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever." (See Settlement Agreement.) In exchange for this release, the Debenture Holders received approximately $1.5 million in cash. (See Settlement Agreement at 1.) On July 22, 2003, in accordance with the Settlement Agreement, the parties filed a final order of dismissal with prejudice of the Socrates Action. (See Order of Dismissal With Prejudice, filed July 22, 2003 ("Order of Dismissal"), at 1-2 ("Whereas The Court has been informed that the parties have agreed to a disposition of this action on terms which include the terms of this order . . . Ordered that this action be and hereby is dismissed with prejudice and without costs against any party.").)
III. Legal Standard
Federal Rule of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). All reasonable inferences must be drawn in favor of the nonmoving party. Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . [T]he nonmoving party must come forward with specific facts showing that there is a genuine issue for trial."Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (internal quotation marks and citations omitted). A genuine issue of material fact exists if "a reasonable jury could return a verdict for the nonmoving party."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
When cross-motions for summary judgment are made, the standard is the same as that for individual motions. See Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001). The court considers each motion independently of the other. See Morales, 249 F.3d at 121.
IV. Analysis
The doctrine of res judicata, or claim preclusion, holds that "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994). "To prove [this] affirmative defense a party must show that (1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs or those in privity with them; (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action." Monahan v. New York City Dept. of Corrections, 214 F.3d 275, 285 (2d Cir. 2000). CBQ has demonstrated each of these three elements as follows:
(1) Adjudication On The Merits
CBQ persuasively argues that the dismissal with prejudice of the Socrates Action operates as a final judgment in that case and constitutes an adjudication on the merits. (Def. Mem. at 9.) Plaintiffs concede that "[a] dismissal with prejudice arising out of a settlement agreement can operate as a final judgment on the merits for res judicata purposes," but contend that "there was no adjudication on the merits with respect to Socrates" because Socrates did not (physically) sign the Settlement Agreement and, therefore, "was [not] a party to the Order of Dismissal with Prejudice in the Socrates Action." (Pl. Mem. at 17.) Plaintiffs further contend that the Order of Dismissal does not bar this suit because "property placed in escrow is equitably owned by the grantee [Plaintiffs] and the grantor [Socrates and CBQ] has the barest legal title." (Pl. Mem. at 14.)
The Order of Dismissal in the Socrates Action dismissed all defendants, including Socrates, with prejudice and constitutes an adjudication on the merits. (See Order of Dismissal at 1-2; Settlement Agreement at 1 ("Whereas all parties . . . wish to achieve a final resolution of the [Socrates Action] without further delay and expense.")); see also Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002) ("It is clear that a dismissal, with prejudice, arising out of a settlement agreement operates as a final judgment for res judicata purposes."); Monahan v. New York City Dept. of Corrections, 214 F.3d 275, 283 (2d Cir. 2000) ("the voluntary dismissal with prejudice of the claims in the [prior] action constituted an adjudication on the merits."); Bekhor v. Bear, Stearns and Co., Inc., No. 96 Civ. 4156, 2004 WL 2389751, at *4 (S.D.N.Y. Oct. 25, 2004) ("Here, the pertinent portion of Settlement Agreement ¶ 8 applies to `agents' of the Josephthal Defendants, `including without limitation its clearing agent BSSC [who had not signed the Settlement Agreement] (and any officer, director, shareholder, affiliate, employee or other representative thereof).' Since BSSC is expressly named in paragraph 8, there is no question that the release applies to it."); O'Hora v. Powerex, Inc., No. 90-CV-1390, 1991 WL 163509, at *6 (N.D.N.Y. Aug. 21 1991) ("Consequently, the comprehensive and expansive settlement agreement between Local 967 and Powerex, which included GE as an intended third party beneficiary, bars this action [against GE] where plaintiffs are simply seeking to litigate issues which they expressly released through the terms of that agreement.")
Plaintiffs argue that they owned the Collateral when the Order of Dismissal was filed in the Socrates Action. (See Pl. Mem. at 14.) CBQ responds (persuasively) that Plaintiffs never owned the Collateral because, among other things, "[i]t is undisputed that Plaintiffs failed to satisfy the bargained for conditions within the requisite time frame provided by the Escrow Agreement," (Def. Reply at 3), particularly by failing to secure an opinion counsel as required to effectuate their interest in the Collateral. (See Escrow Agreement at § 3.1(b) ("any release of the Collateral shall be subject to the receipt by CBQ of an opinion of counsel reasonably satisfactory to CBQ that such distribution of the Collateral to the Debenture Holders is in compliance with state and federal securities laws.")); see also In re Royal Business School, Inc., 157 B.R. 932, 938 (Bankr. E.D.N.Y. 1993) ("In order to effectuate the escrow, the agreed-upon conditions must be fulfilled. Only after the requisite conditions are satisfied, can an escrow be fully transferred to the grantee.");Netherby Ltd. v. G.V. Licensing, Inc., 92 Civ. 4239, 1995 WL 491489, at *1-2 (S.D.N.Y. Aug. 17, 1995); In re Ellison Associates, 63 B.R. 756, 764 (S.D.N.Y. 1983). (2) Privity
Plaintiffs do not dispute that they failed to provide an opinion counsel, but contend that they "contacted CBQ to make the arrangements to provide an opinion of counsel [but] CBQ never responded." (See Pl. 56.1 Stmt. ¶¶ 14-15.) Plaintiffs further contend that, after the fact, "[o]ut of an abundance of caution Plaintiffs provided and [sic] opinion of counsel on February 24, 2005." (See Pl. 56.1 Stmt. ¶ 15.)
CBQ argues that "Plaintiffs were obviously parties to the Socrates Action and CBQ is a privy of Socrates," as the acquirer from Socrates of Technet and Networkland. (Def. Mem. at 10.) Plaintiffs contend that "[w]hile CBQ and Socrates were in privity of contract as to an agreement for CBQ to purchase assets of Socrates' subsidiaries, that does not create privity for res judicata purposes." (Pl. Mem. at 18.)
"It is well settled in this circuit that literal privity is not a requirement for res judicata to apply." Monahan v. New York City Dept. of Corrections, 214 F.3d 275, 285 (2d Cir. 2000);see Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d 343, 346 (2d Cir. 1995) ("Whether there is privity between a party against whom claim preclusion is asserted and a party to prior litigation is a functional inquiry in which the formalities of legal relationships provide clues but not solutions."). "[A] party will be bound by the previous judgment if his interests were adequately represented by another vested with the authority of representation." Monahan v. New York City Dept. of Corrections, 214 F.3d 275, 285 (2d Cir. 2000) (internal citations omitted).
CBQ was in privity of contract with Socrates because, inter alia, it purchased substantially all of Socrates' assets through the Asset Purchase Agreement, agreed to assume liabilities for Technet and Networkland, and was assigned by Socrates, among other things, all "claims and causes of action arising in connection with [Technet and Networkland's] Assets." (See Asset Purchase Agreement ("Subject to the terms and upon satisfaction of the conditions contained in this Agreement, at the Closing, [Socrates, Technet, and Networkland] shall sell, convey, transfer assign and deliver to CBQ the Assets, and [CBQ] shall purchase, acquire and accept from [Socrates, Technet, and Networkland], the Assets, free and clear of all Liens . . . and [CBQ] shall assume and becomes responsible for the Assumed Liabilities.").) CBQ's interests vis-à-vis the Debenture Holders were identical ("closely aligned") to those of Socrates, Technet, and Networkland in the Socrates Action and CBQ is, therefore, entitled to the same res judicata protections as Socrates, Technet, and Networkland. See Sure-Snap Corp. v. State Street Bank and Trust Co., 948 F.2d 869, 877 (2d Cir. 1991) ("the law is well-settled on applying res judicata to third parties whose interests were represented by those closely aligned to them"); Melwani v. Jain, No. 02 Civ. 1224, 2004 WL 1900356, at *2 (S.D.N.Y. Aug. 24, 2004) ("Privity may be found where a party's interest in litigation is virtually identical to an interest it had in a prior litigation, where it was not actually named, but can be said to have had `virtual representation.'"); see also Irish Lesbian and Gay Organization v. Giuliani, 143 F.3d 638, 644 (2d Cir. 1998) ("The doctrines of res judicata and collateral estoppel are designed to protect litigants from the burden of relitigating an identical issue with the same party or his privy and [to promote] judicial economy by preventing needless litigation.").
(3) Claims Related to Prior Action
CBQ argues persuasively that "Plaintiffs' claims in this action are based wholly on their allegation that Socrates has breached its obligations to Plaintiffs under the Debenture Agreement." (Def. Mem. at 10.) Plaintiffs respond that "[t]he current claims for payment on the Note and reissuance of the Shares could not have been brought against anyone but CBQ," and that CBQ was not a party to that litigation. (Pl. Mem. at 20.)
"Whether or not the first judgment will have preclusive effect depends in part on whether the same transaction or connected series of transactions is at issue, whether the same evidence is needed to support both claims, and whether the facts essential to the second were present in the first." Monahan v. New York City Dept. of Corrections, 214 F.3d 275, 285 (2d Cir. 2000) (internal citations omitted). "This rule against claim splitting is based on the belief that it is fairer to require a plaintiff to present in one action all of his theories of recovery relating to a transaction, and all of the evidence relating to those theories, than to permit him to prosecute overlapping or repetitive actions in different courts or at different times." AmBase Corp. v. City Investing Co. Liquidating Trust, 326 F.3d 63, 73 (2d Cir. 2003); L-Tec Electronics Corp. v. Cougar Electronic Corp., 198 F.3d 85, 87-88 (2d Cir. 1999) ("Even claims based upon different legal theories are barred provided they arise from the same transaction or occurrence. Res judicata applies even where new claims are based on newly discovered evidence, unless "the evidence was either fraudulently concealed or it could not have been discovered with due diligence.").
The instant action clearly arises out of the same "transaction or connected series of transactions" as the Socrates Action, namely the alleged default on the debentures purchased by the Plaintiffs from Socrates on or about March 27, 2000. (See Amended Complaint ¶ 19 ("Socrates breached the [notes] by failing to make payments due. . . .")); Woods v. Dunlop Tire Corp., 972 F.2d 36, 38-39 (2d Cir. 1992) (suit barred by res judicata because "essentially the same underlying occurrence was relevant to both [actions]."); Commer v. McEntee, 283 F.Supp.2d 993, 999 (S.D.N.Y. 2003) ("Both actions arise out [plaintiff's] suspension and the charges that were filed against him . . . The . . . claims with respect to those charges . . . are therefore barred by res judicata."). The Collateral was a security interest for any debts owed in connection with those claims. (See Collateral Pledge Agreement at 1 ("In order to induce Debenture Holders to not object to the entry into and performance by Debtors of their obligations under the Asset Purchase Agreement and as security for . . . any and all other sums due from Debtors to Debenture Holders whether arising under the Notes . . . or pursuant to other written agreements . . . Debtors for good and valuable consideration, receipt of which is acknowledged, have agreed to grant Debenture Holders . . . a security interest in certain property specified in this agreement.")); L-Tec Electronics Corp. v. Cougar Electronic Corp., 198 F.3d 85, 87-88 (2d Cir. 1999). The Settlement Agreement extinguished all claims related to the alleged breach of the debentures purchased by Plaintiffs. (See Settlement Agreement (releasing "all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever" against Socrates and its successors).)
V. Conclusion and Order
For the reasons stated herein, Defendant motion for summary judgment [59] is granted, and Plaintiff cross-motion [61] is denied. The Clerk of the Court is respectfully requested to close this case.