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RECCHION v. KIRBY

November 5, 1985

ALFRED R. RECCHION, an individual, and derivatively on Behalf of Westinghouse Electric Corporation, Plaintiff,
v.
ROBERT E. KIRBY, et al., Defendants



The opinion of the court was delivered by: BLOCH

 BLOCH, District J.

 Plaintiff, Alfred R. Recchion, brings this derivative action on behalf of Westinghouse Electric Corporation (Westinghouse) against past and present officers and directors of Westinghouse. The complaint alleges a cause of action against the Individual defendants for breach of their fiduciary duties. This action was originally filed in the Court of Common Pleas of Allegheny County, Pennsylvania, and removed to the United States District Court for the Western District of Pennsylvania on the basis that plaintiff's complaint states a claim under the Securities and Exchange Act of 1934 (the Act), 15 U.S.C. ยง 78a. *fn1" Presently before the Court is the individual defendants who have been served and Westinghouse's (defendants) motion to dismiss for failure to state a claim. Defendants raise several alternative grounds in support of their motion, each of which the Court will discuss. For the reasons that follow, defendants' motion is granted without prejudice.

 On a motion to dismiss brought pursuant to Fed. R. Civ. P. 12(b)(6), such as presented in this case, the Court must limit its consideration of the facts to those alleged in the complaint. Biesenbach v. Guenther, 588 F.2d 400, 402 (3d Cir. 1978). In reviewing a motion to dismiss, the Court must construe all of the allegations of the complaint as true. Scheuer v. Rhodes, 416 U.S. 232, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).

 I. Res Judicata/Collateral Estoppel

 Defendants maintain that plaintiff's action is barred by the doctrines of res judicata and collateral estoppel.

 The doctrine of res judicata serves the purpose of judicial finality. If there is a final, valid judgment rendered on the merits, the doctrine precludes relitigation of the same cause of action between the same parties or their privies. The judgment is a conclusive determination "as to the claim or demand in controversy . . . not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." Donegal Steel Foundry Co. v. Accurate Products Co., 516 F.2d 583, 587 (3d Cir. 1975) (citations omitted). The doctrine of collateral estoppel acts to bar relitigation of the same question in a subsequent proceeding. The conclusive effect of a prior adjudication constitutes an estoppel only with respect to issues actually litigated and necessary to support the initial judgment. Litigation of any matter that was "collaterally in question," "incidentally cognizable," or "to be inferred by argument from the judgment" is not restricted in a subsequent suit. Without identity of issues, the party asserting the defense of collateral estoppel cannot prevail. Id. at 588.

 Although the Court's jurisdiction is based on diversity of citizenship, the res judicata effect to be given to a judgment of a federal court is a matter of federal law. PRC Harris, Inc. v. Boeing Co., 700 F.2d 894, 896 n. 1 (2nd Cir.), cert. denied, 464 U.S. 936, 78 L. Ed. 2d 311, 104 S. Ct. 344 (1983).

 By memorandum opinion and order dated January 25, 1985, this Court dismissed plaintiff's derivative claim in 606 F. Supp. 889, due to plaintiff's failure to comply with the demand requirement of Fed. R. Civ. P. 23.1. *fn2" In that case, plaintiff had not made a demand on the board of directors, but instead averred that demand would have been futile since the directors acquiesced in the complained of conduct and the directors themselves were named defendants. The Court held that plaintiff's complaint did not set forth sufficient facts to excuse demand and, accordingly, granted defendants' motion to dismiss plaintiff's derivative claim. Moreover, the Court denied plaintiff's motion to amend his complaint to include a derivative claim based upon a post-litigation demand on directors. The Court's ruling was based on the fact that Fed. R. Civ. P. 23.1 specifically requires the plaintiff to show that demand was made or was properly excused. The rule does not provide for remedying an omission in the same suit, especially after the defendants have moved to dismiss because of the absence of a demand. Galef v. Alexander, 615 F.2d 51, 59 (2nd Cir. 1980) ("Rule 23.1 is essentially a requirement that a shareholder exhaust his intracorporate remedies before bringing a derivative action."); Shlensky v. Dorsey, 574 F.2d 131, 141 (3d Cir. 1978) ("The contemplated showing of demand made upon the directors after the filing of the shareholders' derivative complaints could not have satisfied the demand requirement of the rule.").

 Subsequently, Recchion entered into a stipulation stating that the 18 defendants named in the derivative count did not have to file answers in view of the Court's dismissal of the derivative action.

 Defendants maintain that the prior proceedings between the parties was a prior adjudication on the merits of Recchion's derivative claim against all the defendants and, accordingly, res judicata bars the instant suit.

 
Fed. R. Civ. P. 41(b) provides as follows: For failure of the plaintiff to prosecute or to comply with these rules or any order of court, a defendant may move for dismissal of an action or of any claim against him. . . . Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits.

 (Emphasis added).

 In Elfenbein v. Gulf & Western Industries, Inc., 590 F.2d 445, 449 (2nd Cir. 1978) (per curiam), the Second Circuit suggested that the district courts use the terms "with prejudice" or "without prejudice" only when making a determination as to the res judicata effect of a dismissal. However, the Third Circuit has taken the position that a district court's dismissal "without prejudice" amounts to an implicit invitation to the plaintiff to amend the complaint. Borelli v. City of Reading, 532 F.2d 950, 951-52 (3d Cir. 1976) (per curiam). However, as previously noted, as a matter of law, plaintiff could not amend the previous complaint to comply with Fed. R. Civ. P. 23.1's demand on directors requirement. Further, the Second Circuit was critical of a district court's dismissal of an amended complaint for failure to comply with Rule 23.1 "with prejudice," which order went on to state that "such ...


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