Gargallo v. Merrill Lynch, Pierce, Fenner & Smith
918 F.2d 658 (1990)
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Rule of Law:
Under the Full Faith and Credit Statute (28 U.S.C. § 1738), a federal court must apply the claim preclusion law of the state where a prior judgment was rendered. If that state's law would not give preclusive effect to a judgment from a court that lacked subject matter jurisdiction, then the federal court cannot give it preclusive effect, even if the claim is within the exclusive jurisdiction of the federal courts.
Facts:
- In 1976, Miguel A. Gargallo opened a margin brokerage account with Merrill Lynch, Pierce, Fenner, & Smith, Inc. ('Merrill Lynch').
- Gargallo maintained the account until 1980, during which time his investments incurred losses.
- As a result of the losses, Gargallo owed a debt of approximately $17,000 to Merrill Lynch on margin calls.
- Gargallo did not pay the outstanding debt to Merrill Lynch.
Procedural Posture:
- Merrill Lynch filed a collection suit against Miguel A. Gargallo in the Court of Common Pleas for Franklin County, Ohio (a state trial court).
- In the state action, Gargallo filed a counterclaim against Merrill Lynch alleging violations of federal securities laws.
- The state trial court dismissed Gargallo's counterclaim 'with prejudice' for his refusal to comply with discovery orders.
- Gargallo, as appellant, appealed the dismissal to the Ohio Court of Appeals, which affirmed the trial court's judgment.
- Gargallo then filed a new complaint in the United States District Court for the Southern District of Ohio against Merrill Lynch and its employee, Larry W. Tyree, alleging the same federal securities law violations.
- The U.S. District Court granted summary judgment for the defendants, dismissing the suit on the grounds of res judicata (claim preclusion) as to Merrill Lynch and collateral estoppel (issue preclusion) as to Tyree.
- Gargallo, as appellant, appealed the district court's dismissal to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does the doctrine of claim preclusion bar a federal securities law claim in federal court when the same claim was previously dismissed 'with prejudice' by a state court that lacked subject matter jurisdiction over it?
Opinions:
Majority - Ryan, Circuit Judge
No. The doctrine of claim preclusion does not bar a federal securities claim in this circumstance because federal courts must apply the preclusion law of the state that rendered the prior judgment, and Ohio law does not give preclusive effect to a judgment from a court that lacked subject matter jurisdiction. The Full Faith and Credit Statute, 28 U.S.C. § 1738, as interpreted by the Supreme Court in Marrese v. American Academy of Orthopaedic Surgeons, requires federal courts to give a state court judgment the same preclusive effect it would have in that state's courts. This rule applies even to claims, like federal securities law violations, over which federal courts have exclusive jurisdiction. The court must therefore determine whether Ohio law would grant preclusive effect to a judgment rendered by a court lacking subject matter jurisdiction. Citing Ohio case law, the court concluded that Ohio follows the general rule that a judgment from a court without subject matter jurisdiction is void and has no claim preclusive effect. Since the state court lacked jurisdiction over the exclusive federal securities claims, its dismissal of Gargallo's counterclaim does not bar the subsequent federal action.
Analysis:
This case clarifies the application of the Marrese framework for analyzing the preclusive effect of state court judgments on exclusively federal claims. It solidifies a two-step analysis: first, federal courts must look to the preclusion law of the state that issued the judgment, not federal common law. Second, the federal court must analyze how that state's law treats judgments rendered without subject matter jurisdiction. This decision prevents a procedural dismissal in a state court, which never had the power to hear the case on the merits, from extinguishing a plaintiff's right to bring an exclusively federal claim in the proper federal forum.
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