when the price of Texas Eastern Corporation ("TEC") stock rose dramatically as a result of a hostile takeover. Because at the time MKI held significant short-call positions on the TEC stock, it suffered heavy losses; MKI lost approximately $ 1.5 million the Monday morning following the takeover announcement. In response, First Options ordered Mr. Kaplan to reduce MKI's risk by adjusting its positions. Mr. Kaplan did not respond to the satisfaction of First Options, and, on January 17, First Options again took over the trading account of MKI. First Options this time barred MKI and Mr. Kaplan from the Exchange and ordered all MKI traders off the Exchange trading floor. First Options proceeded to liquidate MKI's positions; eventually $ 65,000 was added to the deficit that had been outstanding when the workout began. In addition, First Options demanded payment of the tax refund the Kaplans had agreed to remit to it, and contended that Mr. Kaplan was liable, as MKI's alter ego, for all the money MKI still owed First Options. MKI and the Kaplans refused First Options demands.
Since then, the parties have looked to a variety of adjudicatory bodies for vindication of their respective positions. First Options first submitted its claims to the arbitration process of the Exchange. In that forum, First Options brought claims against MKI for accelerated indebtedness under the Workout Agreement, claims against Mr. Kaplan as MKI's alter ego, and claims against Mr. and Mrs. Kaplan for the amount of their 1987 federal tax refund. Mr. Kaplan and MKI filed counterclaims against First Options for breach of contract, interference with prospective business opportunities, and libel and slander.
In May 1992, after eight days of hearings, the seven-member arbitration panel voted five to two in favor of First Options, entering an award for more than $ 5 million against MKI and Mr. Kaplan jointly and severally. The panel ordered Mr. and Mrs. Kaplan to remit their 1987 tax refund to First Options, and also found for First Options on MKI and Mr. Kaplan's counterclaim.
MKI and the Kaplans filed a petition to vacate the award in federal district court; First Options filed a cross-petition seeking confirmation of the award. Another judge of this district confirmed the award. On appeal, the Third Circuit reversed the award in part, finding that the Exchange's arbitration panel had no jurisdiction over Mr. and Mrs. Kaplan. The Supreme Court agreed. Kaplan v. First Options of Chicago, 19 F.3d 1503 (3d Cir. 1994), aff'd, U.S. , 131 L. Ed. 2d 985, 115 S. Ct. 1920 (1995).
On February 2, 1993, while the parties contested the arbitration award, Mr. Kaplan filed for bankruptcy relief under Chapter 11 of the Bankruptcy Code; on November 23, 1993, the case was converted to Chapter 7. On August 31, 1994, First Options filed a proof of claim against Mr. Kaplan's bankruptcy estate for recovery of the Kaplans' $ 346,342 federal tax refund, based on the Letter Agreement in which Mr. Kaplan agreed to remit such refunds to First Options upon their receipt. On November 9, 1994, Mr. Kaplan instituted an adversary proceeding to challenge First Options' claim and to assert his own counterclaims against First Options. The bankruptcy court found in favor of First Options on the counterclaim, concluding that First Options did not breach any contractual obligation to MKI or Mr. Kaplan. In re Kaplan, 1995 Bankr. LEXIS 1140, 1995 WL 500599, at * 6, 9 (Bankr. E.D. Pa. Aug. 22, 1995). The bankruptcy court also found that Mr. Kaplan had an "absolute" obligation to remit the tax refund to First Options, id. at * 9 n.7, and that Mr. Kaplan was individually "liable to First Options in the amount of the refund plus applicable interest." Id. at * 11.
While First Options pursued its remaining claim for the Kaplans' 1987 tax refund against Mr Kaplan in the adversary proceeding, it filed this action against Mrs. Kaplan, raising the same claim and seeking the same damages. On November 15, 1995, First Options filed a motion for summary judgment as to both its claim against Mrs. Kaplan and Mrs. Kaplan's counterclaim against it. On December 5, 1995, Mrs. Kaplan responded to that motion, filing, in addition, her own cross-motion for summary judgment only with respect to First Options' claim against her.
In support of its motion, First Options contends that the adversary proceeding in connection with Mrs. Kaplan's husband's bankruptcy action should have preclusive effects with regard to its breach of contract claim against Mrs. Kaplan and with regard to her breach of contract counterclaim against it. Namely, First Options contends that the bankruptcy court's determination that Mr. Kaplan had an "absolute" obligation under the Workout Agreement to remit the Kaplans' tax refund to First Options precludes Mrs. Kaplan from contesting First Options' claim that she breached her contract with First Options by failing to sign the Kaplans' 1987 tax refund check and failing to remit the check to First Options. Likewise, First Options contends that the bankruptcy court's determination that First Options did not breach any contractual duty to Mr. Kaplan precludes her counterclaim against First Options.
Mrs. Kaplan contests these claims and argues that certain provisions in the Letter Agreement negate the possibility of finding her individually liable for damages for breaching the Letter Agreement. The contentions will be discussed in turn.
II. The Legal Standard
Summary judgment is appropriate if the admissible evidence presents no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Sempier v. Johnson & Higgins, 45 F.3d 724, 727 (3d Cir. 1995) (citing Chipollini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d Cir.) (en banc), cert. dismissed, 483 U.S. 1052 (1987)). The moving party need not produce evidence to disprove the opponent's claim but does carry the burden of demonstrating the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). In turn, the non-moving party cannot rely on the allegations contained in the complaint. Instead, the nonmoving party must offer specific facts indicating that a genuine issue for trial exists. Id. at 324. If there are no genuine issues as to material facts, the court must determine whether the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c).
III. Claim Preclusion
First Option contends that the doctrine of res judicata or claim preclusion prevents Mrs. Kaplan from contesting either its claim against her or her counterclaim against it. Res judicata or claim preclusion works to prevent a party from raising or defending against a claim that has already been decided. Claim preclusion requires a showing that there has been "(1) a final judgment on the merits of a prior suit involving (2) the same claim and (3) the same parties or their privies." Equal Employment Opportunity Comm. v. United States Steel Corp., 921 F.2d 489, 493 (3d Cir. 1990) (citing United States v. Athlone Steel Indus., Inc., 746 F.2d 977, 983 (3d Cir. 1984)).
The parties focus on the last of these elements.
The only parties in the adversary proceeding in bankruptcy court were First Options and Mr. Kaplan. However, claim preclusion may be used by or against "parties or their privies." First Options contends that the relationship between Mr. and Mrs. Kaplan, and their joint relationship to the Workout Agreement and to the 1987 tax refund, renders them privies such that Mrs. Kaplan should be bound by the bankruptcy court's decisions. The claim and counterclaim require separate analysis and will be addressed in turn after review of the law of claim preclusion and privies.
The term privy "is merely a word used to say that the relationship between one who is a party on the record and another is close enough to include the other within the res judicata." United States Steel Corp., 921 F.2d at 493 (citing Bruszewski v. United States, 181 F.2d 419, 423 (3d Cir.), cert. denied, 340 U.S. 865, 95 L. Ed. 632, 71 S. Ct. 87 (1950)); Phillips v. Kidder, Peabody & Co., 750 F. Supp. 603, 607 (1990) ("*fn8"
Courts have typically found privity to exist in three circumstances: (1) where the nonparty has succeeded to, or shares a concurrent right to the party's interest in, property, (2) where the nonparty controlled the prior litigation, and (3) where the party adequately represented the nonparties' interests in the prior proceeding. See, e.g., Latham v. Wells Fargo Bank, N.A., 896 F.2d 979, 983 (5th Cir. 1990); 1B Moore's Federal Practice P 0.411, at III-215.
First Options asserts that Mr. Kaplan was Mrs. Kaplan's "virtual representative" or that he adequately represented Mrs. Kaplan's interests such that the two are privies. The doctrine of virtual or adequate representation has been adopted by many courts. Martin v. Wilks, 490 U.S. 755, 761 n.2, 104 L. Ed. 2d 835, 109 S. Ct. 2180 (1989) (a nonparty may be bound if his interests are "adequately represented by someone with the same interest who is a party"); Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d 343, 345 (2d Cir. 1995) ("Res judicata may be asserted when the precluded party's interests have been adequately represented in a previous lawsuit."); Matter of L & S Indus., Inc., 989 F.2d 929, 933 (7th Cir. 1993) ("[A] person may be bound by a judgment even though not a party if one of the parties to the suit is so closely aligned with his interests as to be his virtual representative."); In re Medomak Canning, 922 F.2d 895, 901 (1st Cir. 1990) ("Privity may be established by identification of interests, even where representation of those interests is not authorized.")
The Third Circuit has not addressed the issue of virtual representation in the context here presented. General principles of the doctrine, as adopted by this Circuit, however, suggest that Mrs. Kaplan is a privy of Mr. Kaplan with respect to the breach of contract counterclaim she asserts against First Options, and that she should thus be barred from litigating that claim.
The Third Circuit has long recognized that privity is a legal conclusion; the privity inquiry should be flexible enough to acknowledge the realities of parties' relationships. Bruszewski, 181 F.2d at 423 (noting that the test for privity is whether there is a sufficiently close relationship between the party to the prior litigation and the nonparty against whom the prior judgment is being used). More recently, in Moldovan v. Great Atlantic & Pacific Tea Co., 790 F.2d 894 (3d Cir. 1986), cert. denied, 485 U.S. 904, 99 L. Ed. 2d 233, 108 S. Ct. 1074 (1988), a panel was asked to determine whether an arbitration ruling to which a union was a party should have preclusive effect in an action to which pension fund trustees were a party. The opinion noted that the "party against whom the collateral estoppel has been asserted [must] have some fair relationship with the prior litigation relied upon." Moldovan, 790 F.2d at 899.
The Moldovan opinion indicates that courts should focus on the "relationship" between the parties and determine "whether there is such an identity of interests between the first and second party that the second should ever be deemed in privity with the first." Id. (emphasis added). In the context of the labor union and trustees for the pension fund, the court determined that whether privity existed depended on the nature of the union's obligation to represent the interests of the trustees. Id. ("Whether the trustees had such a relationship with the prior litigation that its outcome can be held binding upon them depends upon what obligation Local 590 had to safeguard their interests.").
Other cases, involving facts more similar to those presented her, have discussed the spousal relationship and how it affects the preclusion and privity inquiries. For example, in Eubanks v. FDIC, 977 F.2d 166 (5th Cir. 1992), Dr. Eubanks filed for bankruptcy, and his plan was confirmed by the bankruptcy court. Dr. and Mrs. Eubanks subsequently filed suit against two banks, both of which were Dr. Eubanks's creditors, alleging that the creditor-banks violated a state statute and breached fiduciary duties toward Dr. Eubanks, committed fraud, and breached a loan contract. The bank-creditors argued, and the court agreed, that the Eubanks's should have brought the claims in bankruptcy court, and that failure to so precluded them from subsequently raising the claims. In finding that Mrs. Eubanks, who did not participate in the bankruptcy proceedings, was precluded from raising the claims, the court noted:
It is well-settled that, under certain circumstances, a judgment may bar a subsequent action by a person who was not party to the original litigation. . . . For example, where the non-party's interests were adequately represented by a party to the prior action, we have concluded that there is sufficient identity between the parties to apply the principles of res judicata and give preclusive effect to the prior judgment. . . . A non-party, such as Mrs. Eubanks, is adequately represented where a party to the prior suit is so closely aligned to her interest as to be her virtual representative. . . . this requires more than a showing of parallel interests--it is not enough that the non-party may be interested in the same questions or proving the same facts.
Eubanks, 977 F.2d 166 at 170. The court decided that the bank-creditors showed that Dr. and Mrs. Eubanks shared more than parallel interests:
The interests at stake could not be more closely aligned. Mrs. Eubanks purchased no interest in the partnership, and she had no legal relationship with either of the banks. The claims she asserts derive exclusively from claims asserted by her husband. . . . There was sufficient identity of parties to apply principles of res judicata.