United States District Court, E.D. Pennsylvania
January 14, 2004.
MARTIN BRODY and FLORENCE BRODY and MFB PARTNERS, L.P.
MARK HANKIN, Ind. and d/b/a Hankin Management Company and HANKIN MANAGEMENT, INC
The opinion of the court was delivered by: J. JOYNER, District Judge
MEMORANDUM AND ORDER
Via the motion now pending before this Court, Defendants move to
dismiss the plaintiff's complaint pursuant to Fed.R.Civ.P. 12(b)(6) and
on the grounds that it is barred by the principles of res
judicata and/or collateral estoppel. For the reasons outlined below,
the motion shall be granted.
This case arises out of three real estate partnerships in which the
plaintiffs had purchased limited partnership interests in 1983. Those
partnerships, Han Mar Associates XIV, XVIII and XXI, were formed by the
defendant Mark Hankin, who was also the president, vice president and
secretary of the general partner for each partnership, Industrial Real
Estate Management, Inc. ("IREM") and the co-owner of the rental
properties which were the subject of the real estate partnerships.
(Complaint, ¶ 6, 7).
In addition, pursuant to a management and leasing agreement between Mr.
Hankin and the HanMar Partnerships, Mr. Hankin oversaw the management and
leasing of the subject real estate. (Complaint, ¶ 18).
Under the terms of the offering memorandum and subscription agreements
for the partnerships, investors such as the plaintiffs were to pay for
their ownership units by making a down payment and signing an investor
note requiring annual payments to the HanMar partnership over a six-year
period and in exchange, inter alia, the limited partners were to
receive certain "preferred distributions," defined as
"an amount equal to an annualized 8% return on
cash contributed to the Partnership by the
Investors. This return is cumulative and shall be
paid prior to the payment of all obligations
except the principal payments due under the First
Note and the minimum payments due under the Second
(Complaint, ¶ 11, 12). Plaintiffs further aver that under
§ 5.3 of the limited partnership agreements, Mr. Hankin and IREM
agreed that payment of the preferred distributions was to be made prior
to nine other obligations and that Mr. Hankin personally guaranteed the
8% payments regardless of whether there was sufficient cash flow.
(Complaint, ¶ 19-23).
In October, 1987, IREM and Hankin sent to plaintiffs and other limited
partners a proposal to consolidate the three partnerships in which the
plaintiffs had ownership interests together with four other HanMar
partnerships into a single HanMar
Master Limited Partnership and to make various other changes in the
operation of the limited partnerships. According to the plaintiffs, while
there were seven distinct purposes for the proposed exchange, not one of
them included subordination of the preferred distributions, modification
of § 11.7 of the partnership agreements (which until then required
100% of the investors to approve changes in the amendment process),
vesting the General Partner with absolute discretion to alter the order
and priority of disbursements or creating a definition of "cash receipts"
that would permit Mark Hankin to collect interest accruals and other
monies at real estate settlements prior to paying overdue preferred
distributions. (Complaint, ¶ 26, 27). Despite the fact that
plaintiffs and other limited partners did not consent to the proposed
change, some 75% of the limited partners did and all seven HanMar
entities were consolidated into a single HanMar Master Limited
Partnership, the Manager was changed to Hankin Management Company, Inc.
(of which Mark Hankin is the president and secretary), and various other
changes were made affecting the priority of payment of the preferred
distributions, the definition of "cash receipts" and altering the
provisions of sections 5.3 and 11.7 of the previous limited partnership
agreements. Complaint, ¶ 31-34).*fn1
In 1991, Hankin advised plaintiffs that there had been an economic
downturn in the real estate market that was worsening and not expected to
turn around anytime soon. From that point on, the 8% preferred
distributions were not made, despite the fact that IREM sent a letter
advising that the market had recently turned upward, the vacancy rate had
diminished and that the partnership had received an infusion of cash from
refinancings and sales of various properties. (Complaint, ¶ 38). By
letter dated October 3, 2000, Mr. Hankin advised Martin Brody that the 8%
preferred distribution would only be payable after all other obligations
of the partnerships were paid. Plaintiffs later learned that under an
amendment to the master limited partnership agreement dated January 2,
1991, executed by Mark Hankin alone in his capacity as president and
secretary of IREM, the preferred distributions were subordinated to
virtually all other payments. (Complaint, ¶ s44-47).
In February, 2001, Martin and Florence Brody filed a Demand for
Arbitration with the American Arbitration Association against HanMar
Associates, XIV, XVIII and XXI, IREM and Mark Hankin pursuant to §
11.5 of the Limited Partnership articles. Specifically, the Brodys
contended that the HanMar partnerships, IREM and Hankin breached the
partnership agreements and violated their fiduciary duties by failing to
make any of the cumulative preferred 8% distributions to them since 1991
and instead making
payments to other, subordinate claimants in this same time frame.
The Brodys also claimed that the amendments to the partnership agreements
permitting the general partner to unilaterally make future amendments to
the master limited partnership agreement was null and void. Following
pre-arbitration discovery, the arbitrator held four days of hearings on
June 3 and 4, 2002, October 18, 2002 and May 1, 2003 and issued an Award
on June 13, 2003. A Petition to Confirm the Award was filed with the
Court of Common Pleas of Philadelphia County on September 25, 2003 and
remains pending. It is on the basis of this arbitration award that the
defendants here base their claims of res judicata and/or
collateral estoppel. Alternatively, Defendants assert that the
plaintiffs' claims are barred by the statute of limitations and that the
complaint fails to plead any cause of action upon which relief may be
Applicable Standards to Rule 12(b)(6) Motions
It has long been the rule that in considering motions to dismiss
pursuant to Fed.R.Civ.P. 12(b)(6), the district courts must "accept as
true the factual allegations in the complaint and all reasonable
inferences that can be drawn therefrom." Allah v. Seiverling,
229 F.3d 220, 223 (3d Cir. 2000)(internal quotations omitted).
See Also: Ford v. Schering-Plough Corp., 145 F.3d 601, 604
(3d Cir. 1998). A motion to dismiss may only be granted where the
allegations fail to state any claim upon which relief
may be granted. See, Morse v. Lower Merion School
District, 132 F.3d 902, 906 (3d Cir. 1997). In considering a
Rule 12(b)(6) motion, the court primarily considers the allegations of the
complaint but may also consider matters of public record, items appearing
in the record of the case and exhibits to the complaint. Chester
County Intermediate Unit v. Pennsylvania Blue Shield, 896 F.2d 808,
812 (3d Cir. 1990). Dismissal is warranted "if it is certain that no
relief can be granted under any set of facts which could be proved."
Klein v. General Nutrition Companies, Inc., 186 F.3d 338, 342
(3d Cir. 1999)(internal quotations omitted). Although it is an
affirmative defense, res judicata may be raised in a
Rule 12(b)(6) motion and such a motion is particularly appropriate if the
defense is apparent on the face of the complaint. Rycoline Products
v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997); Small
v. Potter, Civ. A. No. 01-3108, 2002 U.S. Dist. LEXIS 241 at *4
(E.D.Pa. Jan. 10, 2002).
Application of the doctrine of res judicata is central to the
purpose for which civil courts have been established, the conclusive
resolution of disputes within their jurisdiction. Montana v.
U.S., 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979).
Res judicata thus avoids the expense and vexation attending
multiple lawsuits, conserves judicial resources, and fosters reliance on
judicial action by minimizing the possibility
of inconsistent decisions. Id.; Mohammed v. May
Department Stores, Co., 273 F. Supp.2d 531, 534 (D.Del. 2003).
Res judicata applies to all claims actually brought or which
could have been brought in a prior action regardless of whether they were
asserted or determined in the prior proceeding. Brown v.
Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767
(1979); Small v. Potter, 2002 U.S. Dist. LEXIS 241 at *5.
The doctrine of res judicata is often analyzed to consist of
two preclusion concepts: issue preclusion and claim preclusion.
E.E.O.C. v. U.S. Steel Corp., 921 F.2d 489, 493 (3d Cir. 1990),
quoting Miqra v. Warren City School District Board of
Education, 465 U.S. 75, n.l, 104 S.Ct. 892, n.l, 79 L.Ed.2d 56
(1984). Issue preclusion has also been referred to as collateral
estoppel. Venuto v. Witco Corp., 117 F.3d 754, 758 (3d Cir.
1997). Under collateral estoppel or issue preclusion, once an issue is
actually and necessarily determined by a court of competent jurisdiction,
that determination is conclusive in subsequent suits based on a different
cause of action involving a party to the prior cause of action.
Tyler v. O'Neill, 52 F. Supp.2d 471, 474 (E.D.Pa. 1999),
aff'd, 225 F.3d 650 (3d Cir. 2000). Claim preclusion or res
judicata provides that when a court has entered a final judgment on
the merits of a cause of action, the parties to the suit and their
privies are thereafter bound "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."
Id. quoting, inter alia Commissioner of Internal
Revenue v. Sunnen, 333 U.S. 591, 597, 68 S.Ct. 715, 92 L.Ed.2d 898
(1948). A party may not split a cause of action into separate grounds of
recovery and raise the separate grounds in successive lawsuits; a party
must raise in a single suit all the grounds of recovery arising from a
single transaction or series of transactions that can be brought
together. Inofast Manufacturing, Inc. v. Bardsley,
103 F. Supp.2d 847, 849 (E.D.Pa. 2000), aff'd, 265 F.3d 1055 (3d Cir.
2001), citing Mars, Inc. v. Nippon Conlux Kabushiki-Kaisha,
58 F.3d 616, 619-620 (Fed. Cir. 1995) and Gregory v. Chehi,
843 F.2d 111, 117 (3d Cir. 1988). A defendant may thus prevail on the defense
of res judicata or claim preclusion by showing (1) that there
has been a final judgment on the merits in the prior suit; (2) the claims
involve the same parties or their privies; and (3) the subsequent suit is
based on the same cause of action as the prior suit. African
International Bank v. Epstein, 10 F.3d 168, 171 (3d Cir. 1993);
Small v. Potter, supra.
In this case of course, we are additionally faced with the question of
whether an arbitration award should be given the same preclusive effect
as a state court judgment. Generally, res judicata rules must
sometimes be adapted to fit the arbitration
context. In re Kaplan, 143 F.3d 807, 815 (3d Cir. 1998).
Where, however, a party voluntarily submits a dispute to arbitration he
is bound by the award where his statements and conduct manifests a clear
intent to arbitrate. Jones v. Schaffer, Civ. A. No. 86-3733,
1987 U.S. Dist. LEXIS 7270 at *10-11 (E.D.Pa. August 12, 1987), citing
Teamsters Local Union No. 764 v. J.H. Meritt & Co.,
770 F.2d 40 (3d Cir. 1985). Thus, an arbitration award, unless and until
invalidated, creates or authoritatively declares rights even as a
judgment does and further litigation of a claim submitted to an
arbitrator is precluded by the entry of an award thereon. Bank of
America National Trust & Savings Association v. Hotel Rittenhouse
Associates, Civ. A. No. 83-2809, 1989 U.S. Dist. LEXIS 5415 at
*11-12 (E.D.Pa. May 15, 1989), citing, inter alia,
Schattner v. Girard, Inc., 668 F.2d 1366, 1368 (D.C. Cir. 1981),
Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242, 245
(3d Cir. 1968) and Nix v. Spector Freight Systems, Inc.,
264 F.2d 875, 877 (3d Cir. 1959). Furthermore, the preclusive effect of the
award also extends to those claims that should have been but were not
submitted to the arbitrator. Id. See Also: The Sports
Factory, Inc. v. Chanoff, 586 F. Supp. 342, 347-348 (E.D.Pa. 1984).
In other words, a confirmed arbitration award will render those claims
that should have been raised at the arbitration res judicata,
regardless of whether or not they in fact were raised. Smith v.
Denver Food Systems, Inc., Civ. A.
No. 94-0045, 1994 U.S. Dist. LEXIS 14400 (E.D.Pa. October 5, 1994).
As the attachments to the defendant's motion to dismiss reflect, the
"nature of the dispute" heard by the arbitrator upon demand by the
plaintiffs here was whether the HanMar partnerships, IREM and Hankin
breached the partnership agreements and violated their fiduciary duties
by failing to make any of the cumulative preferred 8% distributions to
them since 1991 and instead making payments to other, subordinate
claimants in this same time frame and whether the amendments to the
partnership agreements permitting the general partner to unilaterally
make future amendments to the master limited partnership agreement were
null and void.*fn2 In this action, plaintiffs again bring
claims for breach of fiduciary duty and breach of contract and
again seek compensatory damages in the amount of the unpaid 8% preferred
distributions and declaratory and equitable relief such as to compel
defendants to cease their allegedly unlawful practices. In addition,
however, plaintiffs also seek relief under the theories of unjust
enrichment, conversion and civil RICO, but these claims likewise arose
out of the same facts and series of transactions as did the claims for
breach of contract and breach of fiduciary duty.*fn3 After four full
days of hearings at which Martin Brody, Mark Hankin and various other
witnesses testified and numerous exhibits were admitted, the arbitrator
entered an Award on June 13, 2000, denying in large part the Brodys'
requests for relief and finding that the actions taken by Hankin and the
General Partner, IREM were generally appropriate except as to the $86,189
difference between the Third Note payment in 2000 and the mandatory
payment on the Second Note which should have been applied to payment of
accrued but unpaid
Preferred Distributions and the payment of life insurance premiums
on Mark Hankin's life from cash receipts from MLP and not from advances
from the General Partner during calendar years 1995, 1996 and 1997. Thus,
the arbitrator awarded to plaintiffs their percentage interest of the
$86,189 plus their percentage interest of the life insurance payments
made in or for the years 1995-1997 by HanMar Associates XIV, XVIII and
XXI. Neither IREM nor the Brodys challenged or sought modification of the
arbitrator's award and the defendants filed a petition to confirm the
award with the Court of Common Pleas of Philadelphia County on September
25, 2003. Under 42 Pa.C.S. § 7341, governing common law arbitration,
The award of an arbitrator in a nonjudicial
arbitration which is not subject to Subchapter A
(relating to statutory arbitration) or a similar
statute regulating nonjudicial arbitration
proceedings is binding and may not be vacated or
modified unless it is clearly shown that a party
was denied a hearing or that fraud, misconduct,
corruption or other irregularity caused the
rendition of an unjust, inequitable or
"[o]n application of a party made more than 30
days after an award is made by an arbitrator under
section 7341 (relating to common law arbitration)
the Court shall enter an order confirming the
award and shall enter a judgment or decree in
conformity with the order . . ."
42 Pa.C.S. § 7342(b). Given that this statute dictates that an
arbitrator's award is binding and cannot be vacated or modified unless a
showing of fraud, misconduct, corruption or other irregularity can be
made and that an order confirming an
arbitration award shall be entered upon a party's
application where more than 30 days has elapsed without challenge, we
find that whether or not the Common Pleas Court has yet to formally
confirm the award, it must do so to comply with the foregoing provisions
of the Pennsylvania Uniform Arbitration Act. Thus, we believe that the
arbitration award rendered in this case constitutes a final judgment on
the merits in a prior suit based on the same causes of action.
Although Mr. Hankin was dismissed as a party in the proceedings before
the arbitrator because he was not a signatory in his individual capacity
to the partnership agreements, he was at all relevant times the
president, vice president and secretary of IREM and testified as the
corporate representative on its behalf at the arbitration hearings.
Privity is said to exist where a party adequately represented the
nonparties' interests in the prior proceeding. Inofast,
103 F. Supp.2d at 849, citing Berwind v. Corporation v. Apfel,
94 F. Supp.2d 597, 609 (E.D.Pa. 2000). We therefore find that Mr. Hankin is
and was in privity with the general partner, IREM in both the arbitration
proceedings and in the instant case. Accordingly, we find that there is
sufficient identity of parties and causes of action to invoke the bar of
res judicata. The defendants' motion to dismiss shall therefore
be granted and the complaint dismissed with prejudice pursuant to the
AND NOW, this day of January, 2004, upon consideration of Defendant's
Motion to Dismiss Plaintiffs' Complaint and Plaintiffs' Response thereto,
it is hereby ORDERED that the Motion is GRANTED and Plaintiffs' Complaint
is DISMISSED with prejudice for the reasons set forth in the preceding