Watkins v. Resorts International Hotel & Casino Inc.

The opinion of the Court was delivered by

This appeal concerns the preclusive effect of a federal judgment in a state court. Specifically, it requires us to decide whether state law claims brought in a state court are precluded by a prior federal court judgment dismissing federal law claims based on the same facts, if the federal claims were dismissed for insufficient service of process and for lack of standing.

Plaintiffs, Murrell Watkins and Abraham McDaniel and their wholly-owned companies, sued Resorts International (Resorts), Bally’s Park Place Casino (Bally’s), and other defendants in federal district court, claiming that as minority bus-line owners they had been the targets of discriminatory practices. The claims, which sought relief pursuant to 42 U.S.C. sections 1981, 1983, 1985(3), and 1988, were dismissed on motion for various reasons, including insufficient service of process and lack of standing.

*402 Relying on state law, Watkins and McDaniel then filed this action in the Superior Court based on the same allegations of discrimination that underlay their federal claims. The Law Division granted defendants’ motion to dismiss, R. 4:6-2(e), on the ground that plaintiffs were barred by the entire controversy doctrine from relitigating the same cause of action that had already been decided in federal court. See R. 4:30A (formerly R. 4:27-1(b)). In an unreported decision, the Appellate Division affirmed on grounds of res judicata, collateral estoppel, and the entire controversy doctrine. We granted certification, 122 N.J. 195, 584 A.32d 253 (1990), and now reverse the judgment of the Appellate Division and remand the matter to the Law Division. Although state courts must honor judgments of federal courts, dismissals for insufficient service of process or lack of standing do not preclude relitigation. Consequently, the federal judgments against Watkins and McDaniel do not bar their state claims.

-I-

For purposes of this appeal, we accept the facts as alleged in the complaint. Heavner v. Uniroyal, Inc., 63 N.J. 130, 133, 305 A.2d 412 (1973). Plaintiff Watkins and his wife were the sole shareholders in Ocean Breeze Transit Company (Ocean Breeze), a bus company that operated service to Atlantic City casinos. Plaintiff McDaniel owned Cobra Coach Lines, Inc. (Cobra), which also operated bus service to Atlantic City. Plaintiffs, who are black, allege that Resorts and Bally’s discriminated against them by interfering with their efforts to operate bus lines to the casinos.

In 1982 Resorts granted Ocean Breeze permission to provide bus service to its casino. When the first Ocean Breeze bus arrived, however, a casino representative told the driver that the buses should not return because they were too old and dirty. According to Watkins, Resorts executive Alan McClain later told Watkins: “[Jjust because you niggers get a license *403 and buses, we do not have to let you into the casino.” Finally, McClain informed Watkins that Ocean Breeze would not be allowed to service Resorts unless it used buses less than two years old. Resorts, however, continued to allow white-owned bus companies with older buses to provide transportation to the casino.

Watkins alleges that Bally’s also discriminated against him. When Watkins began servicing the casino around 1980, McClain was Bally’s project manager. According to Watkins, McClain and another Bally’s executive, Eugene McDermott, helped several white-owned bus companies to usurp Watkins’s designated territories. Claiming that these companies had failed to comply with licensing requirements, Watkins notified defendant Frank Fitzsimmons of the New Jersey Department of Transportation (DOT), but Fitzsimmons took no action. Watkins alleges that Fitzsimmons’s failure to take action “eventually resulted in the revocation of his line run from Cape May to [Resorts and Bally’s].” He alleges further that because of defendants’ discrimination, he and his wife were forced to mortgage their home and sell their Ocean Breeze shares to avoid personal bankruptcy.

McDaniel alleges that he was the victim of similar racial discrimination. Resorts denied his request for Cobra to provide transportation because it did not want black groups coming to the casino. White-owned companies, however, were subsequently- permitted to provide transportation from the same sites. When McDaniel later sought permission to operate new lines from Harlem and the South Bronx, McClain allegedly told him that the people from those neighborhoods were not the type of people Resorts wanted in its casino.

McDaniel further alleges that when he sought to establish a line from Harlem and the South Bronx to Bally’s, McClain told him that lines from those neighborhoods were undesirable. According to McDaniel, McDermott said he was concerned about the number of blacks in the casino. Bally’s, however, *404 later granted permission for a white-owned company to service those areas. McDaniel alleges that as a result of defendants’ discrimination, he lost his investment in Cobra and was forced to declare personal bankruptcy.

On August 27, 1984, Watkins, McDaniel, Ocean Breeze, and Cobra filed suit in the United States District Court for the District of New Jersey, claiming civil rights violations under 42 U.S.C. sections 1981, 1983, 1985(3), and 1988. Thé complaint named the same defendants as in the instant matter: Resorts, Bally’s, McClain, McDermott, the DOT, and Fitzsimmons. Plaintiffs did not assert any pendent state claims. Eventually, the federal court dismissed all of the claims. First, on June 12, 1985, the court dismissed plaintiffs’ section 1983 claim. Plaintiffs stipulated to a dismissal with prejudice of their section 1985 claim, leaving only the section 1981 claim and the derivative section 1988 claim for attorneys’ fees. Then, on November 27, 1985, the court dismissed the complaint against Bally’s for insufficient service of process under Federal Rule of Civil Procedure 4(j). Specifically, the court dismissed the complaint without prejudice because plaintiffs had failed to serve the summons and complaint on Bally’s within 120 days of filing the complaint, contrary to Federal Rule of Civil Procedure 4(j). Plaintiffs voluntarily dismissed their complaint against DOT.

Most significantly for our purposes, the district court on November 27, 1985, granted Resorts’ motion to dismiss the complaint of the individual plaintiffs, Watkins and McDaniel, because they lacked standing to sue. Relying on federal law, the court explained that a shareholder, even a sole shareholder such as McDaniel, cannot maintain a civil rights action to redress damages suffered by a corporation. The court held that Watkins’ sale of his Ocean Breeze stock did not confer standing on him to maintain such an action. The United States Court of Appeals for the Third Circuit affirmed the judgment dismissing the individual plaintiffs’ claims. In an order dismissing the remaining counts, the district court stated:

*405 It appearing that it has been reported to the Court by plaintiffs’ counsel that plaintiffs do not wish to proceed any further in this matter;

It is on this 27th day of May, 1987, ORDERED that this action is hereby DISMISSED with prejudice.

Plaintiffs did not appeal from that order.

Shortly thereafter, Watkins and McDaniel brought suit in the Law Division. As in the federal action, they claimed that as minority bus-line owners they were the targets of discrimination by the two casinos, their employees, and DOT. Plaintiffs alleged the same facts as those in their federal complaint. Instead of alleging violations of federal anti-discrimination laws, however, plaintiffs founded their claims entirely on state law, asserting violations of article I, paragraph 1 of the New Jersey Constitution; the Casino Control Act, N.J.S.A. 5:12-1 to -190, N.J.S.A. 5:12-135; and the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 to -42.

Resorts moved to dismiss the complaint, arguing that the entire controversy doctrine, res judicata, or collateral estoppel precluded plaintiffs’ action. It argued that no private cause of action existed under the Casino Control Act. The court agreed that the state cause of action was essentially the same as the federal action, and that the entire controversy doctrine barred plaintiffs from relitigating the matter. The trial court therefore granted the motion to dismiss. As to DOT, the court dismissed plaintiffs’ complaint for failure to state a claim.

Before the Appellate Division, plaintiffs argued that the federal court had not determined the matter on its merits and that therefore neither res judicata, collateral estoppel, nor the entire controversy doctrine should bar the state court action. The Appellate Division disagreed, and affirmed the dismissal. As to Resorts, the court viewed the dismissal for lack of standing as a resolution on the merits, stating that the district court’s “holding was that the claims which the individual plaintiffs were asserting belonged solely to their corporations and, therefore, the individuals were not entitled to redress.” The court held that plaintiffs’ claims against Resorts were barred *406 by res judicata or collateral estoppel. As to Bally’s, the court affirmed the dismissal on the ground of the entire controversy doctrine. The court determined that although the federal dismissal for insufficient service of process was not on the merits and therefore did not itself preclude the state suit, Bally’s was a necessary party and the dismissal of the federal suit against Resorts barred a later action against Bally’s.

-II-

A fundamental feature of the relationship between state and federal courts is that the courts of each system must respect the judgments of courts of the other system. That respect is essential to the fair and efficient functioning of our federalist system of justice. The rule that state courts must accord preclusive effect to prior federal court judgments is so settled that it is accepted as axiomatic. Younger v. Jensen, 26 Cal.3d 397, 411, 605 P.2d 813, 822, 161 Cal.Rptr. 905, 914 (1980); Pilié & Pilié v. Metz, 547 So. 2d 1305, 1308-09 (La.1989); Velasquez v. Franz, 123 N.J. 498, 506-08, 589 A.2d 143, 147-48 (1991); Bardo v. Commonwealth Dep’t of Pub. Welfare, 40 Pa.Commw. 585, 587-89, 397 A.2d 1305, 1307 (1979); see also Degnan, Federalized Res Judicata, 85 Yale L.J. 741, 744-45 n. 17 (1976) (citing early state cases reciting the rule). This case requires that we search for the reasons beneath the rule.

Our inquiry begins with the full faith and credit clause of the United States Constitution, which provides that “[fjull Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.” U.S. Const, art. IY, § 1. That clause directs the courts of each state to give preclusive effect to the judgments of a sister state. The clause, however, does not expressly require state courts to accept the judgments of a federal court.

Nor does the federal full faith and credit statute, 28 U.S.C.A. § 1738, impose that requirement. The statute provides that

*407 judicial proceedings [of any State, Territory or Possession of the United States] * * * shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.

Because they are included in “every court within the United States,” federal courts are required to give full faith and credit to the judgments defined in the statute. The judgments so defined, however, are those “of any State, Territory, or Possession of the United States,” not those of the federal courts. Thus, the statute does not compel state courts to give preclusive effect to judgments of the federal courts. In sum, neither the constitutional full faith and credit clause nor the corresponding federal statute solves the problem.

Some older cases purported to find the answer in the full faith and credit clause of the federal constitution. See Bigelow v. Old Dominion Copper Mining & Smelting Co., 225 U.S. 111, 129, 32 S.Ct. 641, 643, 56 L.Ed. 1009, 1022 (1912) (addressing federal-state preclusion issue as one governed by the full faith and credit clause and its implementing statute, and holding that a federal court judgment “is entitled to the same sanction which would attach to a like judgment of a court of the state”); National Foundry & Pipe Works v. Oconto City Water Supply Co., 183 U.S. 216, 233, 22 S.Ct. 111, 118, 46 L.Ed. 157, 169 (1902) (holding that state court’s failure to give due effect to federal court decree raises federal question, citing, inter alia, Jacobs v. Marks, 182 U.S. 583, 587, 21 S.Ct. 865, 867, 45 L.Ed. 1241, 1244 (1901), a state-state interjurisdictional preclusion case based on the full faith and credit clause); Hancock Nat’l Bank v. Farnum, 176 U.S. 640, 645, 20 S.Ct. 506, 507-08, 44 L.Ed. 619, 621 (1900) (reciting the constitutional and statutory full faith and credit rule for state-state preclusion, and then stating that “[t]he fact that this judgment was rendered in a court of the United States, sitting within the state of Kansas, instead of one of the state courts, is immaterial”). Courts also looked to the federal full faith and credit statute or its predecessor. See Bigelow, supra, 225 U.S. at 133, 32 S.Ct. at 643, 56 L.Ed. at 1023; Hancock Nat’l Bank, supra, 176 U.S. *408 at 642, 20 S. Ct. at 507-08, 44 L.Ed. at 620; Embry v. Palmer, 107 U.S. 3, 2 S.Ct. 25, 30-31, 27 L.Ed. 346, 348-49 (1883); see also Supreme Lodge, Knights of Pythias v. Meyer, 265 U.S. 30, 33, 44 S.Ct. 432, 433, 68 L.Ed. 885, 888 (1924) (citing Hancock Nat’l Bank and Embry v. Palmer for rule of federal-state preclusion); Hazen Research, Inc. v. Omega Minerals, Inc., 497 F.2d 151, 153 n. 1 (5th Cir.1974) (courts have read “into § 1738 a requirement that state courts extend full respect to the judgments of federal judicial tribunals within the states”); Shell Oil Co. v. Texas Gas Transmission Corp., 176 No.2d 692, 696 (La.Ct.App.1965) (“The statute, 28 U.S.C. § 1738, requires each state to give the same effect to the judgments of state and federal courts as those judgments have in the jurisdiction where rendered.”). As previously noted, however, neither the full faith and credit clause of the Constitution nor the corresponding federal statute applies. In brief, positive law does not expressly mandate that state courts give preclusive effect to the judgments of federal courts.

Generally without analysis, state courts have accepted federal court judgments as binding. Degnan, supra, 85 Yale L.J. at 744 n. 17. In the absence of any such analysis, respected scholars have theorized about the basis for the preclusive effect in state courts of federal court judgments. For example, Professor Charles Alan Wright, drawing on an explanation of Professor Ronan Degnan, states:

Article III limits the federal judicial power to cases and controversies. To decide a case or controversy implies some binding effect. Proceedings that do not have at least the potential effect of precluding later relitigation of the same claims and issues would constitute something other than the exercise of the judicial power. Once it is accepted that Article III and its implementing legislation have created courts with the power to issue judgments that will have preclusive effects in other litigation, the Supremacy Clause of Article VI mandates that those preclusive effects are binding on state courts.

[C. Wright, The Law of Federal Courts 694-95 (4th ed. 1983) (citing Degnan, supra, 85 Yale L.J. at 742-49, 768-69).]

See also Degnan, supra, 85 Yale L.J. at 772-73 (federal-state preclusion “will have to be placed forthrightly on the ground that the integrity of the federal judicial power is at stake”); cf. *409 Burbank, Interjurisdictional Preclusion, Full Faith and Credit and Federal Common Law: A General Approach, 71 Cornell L.Rev. 733, 753-55 & n. 92 (1986) (questioning how far Professor Degnan’s article III analysis can go, but acknowledging article Ill’s significance in imposing basic obligation to respect federal judgments). Professor Wright’s analysis echoes the earlier analysis in Dupasseur v. Rochereau, 88 U.S. (21 Wall.) 130, 22 L.Ed. 588 (1875), in which the United States Supreme Court held that a state court’s failure to honor a federal court judgment constituted a federal question triggering the jurisdiction of the Supreme Court.

By insulating courts from the relitigation of claims, res judicata prevents the judicial inefficiency inherent in multiplicitous litigation. At some point litigation over a particular controversy should end. See Velasquez, supra, 123 N.J. at 505, 589 A.2d at 147; Restatement (Second) of Judgments § 19 comment a (1982). By preventing harassment of parties, preclusion serves the interest of fairness. Preclusion further protects the integrity of the judgments of state and federal courts. The strength of a judgment derives from the expectation that it will be binding. Essential to the proper functioning of state and federal courts is the principle that a disappointed litigant may not circumvent a judgment entered in one system by relitigating the claim or the decided issues in the other system. Generally speaking, whether started in state or federal courts, the determination of a case in one system should conclude the matter.

Beyond the general policy favoring finality, inteijurisdictional preclusion serves the vital function of unifying the nation. The United States Supreme Court, this Court, and scholars have recognized that the full faith and credit clause, by obliging each state to enforce the judgments of another state, fulfills this function. As the United States Supreme Court has written,

[t]he full faith and credit clause like the commerce clause thus became a nationally unifying force. It altered the status of the several states as independent foreign sovereignties, each free to ignore rights and obligations *410 created under the laws or established by the judicial proceedings of the others, by making each an integral part of a single nation, in which rights judicially established in any part are given nation-wide application.

[Magnolia Petroleum Co. v. Hunt, 320 U.S. 430, 439, 64 S.Ct. 208, 214, 88 L.Ed. 149, 155-56 (1943).]

See Borys v. Borys, 76 N.J. 103, 109-11, 386 A.2d 366 (1978); Reese & Johnson, The Scope of Full Faith and Credit to Judgments, 49 Colum.L.Rev. 153, 161 (1949) (the framers of the full faith and credit clause intended “to give us the benefits of a unified nation by altering the status of otherwise ‘independent, sovereign states’ ”) (quoting Sherrer v. Sherrer, 334 U.S. 343, 355, 68 S.Ct. 1087, 1093, 92 L.Ed. 1429, 1438 (1948)).

Just as cohesion between state courts is necessary for national unity, cohesion between state and federal courts is necessary for the continuing vitality of the federalist system. Maintaining a cohesive federal system requires not only that federal courts honor state court judgments, as mandated by 28 U.S. C. § 1738, but also that state courts honor federal court judgments. See Mobil Oil Corp. v. Shevin, 354 So.2d 372, 375-76 (Fla.1977). As we said in Velasquez, supra, 123 N.J. at 512, 589 A.2d at 151, “[w]e would not approve a federal court’s decision to ignore a judgment of our trial court. We will not embrace the opposite course here.”

Plaintiffs ordinarily have one chance to prove their case. Overlapping jurisdiction frequently gives plaintiffs the option of suing in either the state or the federal system. The availability of alternative forums should not give plaintiffs the additional luxury of suing first in one system and then in the other.

When a state court considers the binding effect of a federal court judgment, nothing less is at stake than the integrity of federal judicial power and the coherence of the federalist judicial system. See Degnan, supra, 85 Yale L.J. at 773. So viewed, state courts are bound by federal court judgments, just as they are bound by the judgments of sister states. Consequently, a cause of action finally determined on the *411 merits by a competent federal court cannot be relitigated by the same parties or their privies in a state court.

We now consider the question of what law governs the preclusive effect of a federal judgment in state court. In general, the binding effect of a judgment is determined by the law of the jurisdiction that rendered it. Restatement (Second) of Conflict of Laws § 95 comment e (1971). This rule applies not only when considering the preclusive effect of a judgment of one state court on the courts of another state, but also when determining the preclusive effect in a state court of a federal court judgment. Blonder-Tongue Laboratories, 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, 797 n. 12 (1971); Stoll v. Gottlieb, 305 U.S. 165, 170-71, 59 S.Ct. 134, 137, 83 L.Ed. 104, 108 (1938); Deposit Bank v. Frankfort, 191 U.S. 499, 520, 24 S.Ct. 154, 159-60, 48 L.Ed. 276, 284 (1903); In re Energy Coop., Inc., 814 F.2d 1226, 1230 (7th Cir.), cert. denied, 484 U.S. 928, 108 S.Ct. 294, 98 L.Ed. 2d 254 (1987); Degnan, supra, 85 Yale L.J. at 768-70; C. Wright, supra, at 695. The Restatement (Second) of Judgments, supra, § 87, states the rule plainly: “Federal law determines the effects under the rules of res judicata of a judgment of a federal court.”

In principle, the preclusive effect of a judgment is the logical consequence of the procedures of the issuing court. See id. Introduction at 6-13. “Within the constitutional limits, the contours of res judicata are determined by the particulars of the opportunity to litigate afforded by the system of procedure in question.” Id. at 7. The underlying consideration is whether the contending party in the second forum was accorded a “full and fair” opportunity to litigate in the first forum. Id. at 9.

It follows that ordinarily a federal court judgment would be neither more nor less binding in the courts of this State than it would be in the federal courts. The reason is that the preclusive effect of the judgment is a function of the procedures of *412 the federal court that rendered it. Id. at 5. These considerations affect the applicability of the entire controversy doctrine, on which the Appellate Division relied. That doctrine, like res judicata, advances the goals of fairness, efficiency, and finality. Cogdell v. Hospital Center, 116 N.J. 7, 15-17, 560 A.2d 1169 (1989); Ajamian v. Schlanger, 14 N.J. 483, 485, 103 A.2d 9, cert. denied, 348 U.S. 835, 75 S.Ct. 58, 99 L.Ed. 659 (1954). In limited circumstances, the entire controversy doctrine may preclude an action that is not otherwise precluded by the federal law of res judicata. We note in this context the decision of the Appellate Division in Blazer Corp. v. New Jersey Sports & Exposition Authority, 199 N.J. Super. 107, 488 A.2d 1025 (1985). There, the court relied on the entire controversy doctrine to bar a Superior Court action that “formed the foundation,” id. at 109, 488 A.2d 1025, of a previously dismissed federal action. Our reading of that opinion leads us to conclude that the Appellate Division may not have sufficiently considered the federal law of claim preclusion in resorting to the entire controversy doctrine.

We turn therefore to the federal law of claim preclusion. Federal law requires the same three basic elements as New Jersey law: (1) the judgment in the prior action must be valid, final, and on the merits; (2) the parties in the later action must be identical to or in privity with those in the prior action; and (3) the claim in the later action must grow out of the same transaction or occurrence as the claim in the earlier one. Federated Dep’t Stores v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2428, 69 L.Ed.2d 103, 108 (1981); In re Energy Coop., supra, 814 F.2d at 1230; see Velasquez, supra, 123 N.J. at 505-06, 589 A.2d at 147; Roberts v. Goldner, 79 N.J. 82, 85, 397 A.2d 1090 (1979).

Claim preclusion applies not only to matters actually determined in an earlier action, but to all relevant matters that could have been so determined. Angel v. Bullington, 330 U.S. 183, 192-93, 67 S.Ct. 657, 662, 91 L.Ed. 832, 838-39 (1947); *413 Culver v. Insurance Co. of N. Am., 115 N.J. 451, 463, 559 A.2d 400 (1989). For the purposes of res judicata, causes of action are deemed part of a single “claim” if they arise out of the same transaction or occurrence. Restatement (Second) of Judgments, supra, § 24. If, under various theories, a litigant seeks to remedy a single wrong, then that litigant should present all theories in the first action. Otherwise, theories not raised will be precluded in a later action. Angel, supra, 330 U.S. at 192-93, 67 S.Ct. at 662, 91 L.Ed. at 838-39; Cemer v. Marathon Oil Co., 583 F.2d 830, 832 (6th Cir.1978). Thus, if a federal court in a prior action would have exercised pendent jurisdiction over related state claims that were not asserted, a final judgment on the merits by the federal court precludes raising those claims in a subsequent action in state court. Federated Dep’t Stores, supra, 452 U.S. at 404, 101 S.Ct. at 2431, 69 L.Ed.2d at 112 (Blackmun, J., concurring); Harper Plastics, Inc. v. Amoco Chems. Corp., 657 F.2d 939, 942 (7th Cir.1981); Browning Debenture Holders’ Comm. v. DASA Corp., 605 F.2d 35, 39 (2d Cir.1978); Ford Motor Co. v. Superior Court, 35 Cal.App.3d 676, 680, 110 Cal.Rptr. 59, 62 (1973); Belliston v. Texaco, 521 P.2d 379, 382 (Utah 1974).

If, on the other hand, a claim could not have been presented in the first action, then it will not be precluded in a later action. The Restatement (Second) of Judgments explains:

When the plaintiff brings an action on the claim in a court, either state or federal, in which there is no jurisdictional obstacle to his advancing both theories or grounds, but he presents only one of them, and judgment is entered with respect to it, he may not maintain a second action in which he tenders the other theory or ground. If, however, the court in the first action would clearly not have had jurisdiction to entertain the omitted theory or ground (or, having jurisdiction, would clearly have declined to exercise it as a matter of discretion), then a second action in a competent court presenting the omitted theory or ground should be held not precluded.

[§ 25 comment e.]

See also id. § 26(1)(c) (subject matter jurisdiction exception to rule against claim splitting). If the plaintiffs could not have asserted both state and federal claims in a single forum, it