Phila. Fin. Mgmt. of San Francisco, LLC v. DJSP Enters., Inc.

227 So.3d 612

PHILADELPHIA FINANCIAL MANAGEMENT OF SAN FRANCISCO, LLC, and Blue Lion Master Fund, L.P., Appellants,

v.DJSP ENTERPRISES, INC., David J. Stern, Kumar Gursahaney, and Gary Curson, DPM. Appellees.

No. 4D16-870.

District Court of Appeal of Florida, Fourth District.

[August 2, 2017]

Daniel M. Cohen, Matthew E. Miller, and Jonathan W. Cuneo of Cuneo Gilbert & LaDuca, LLP, Washington, DC; Charles J. LaDuca of Cuneo Gilbert & LaDuca, LLP, Bethesda, MD; Scott R. Shepherd and Nathan Zipperian of Shepherd, Finkelman, Miller & Shah, LLP, Weston; David M. Marek of Liddle & Robinson, L.L.P., New York, NY; Joseph E. White, III and Lester R. Hooker of Saxena White, P.A., Boca Raton; Richard S. Wayne and Thomas P. Glass of Strauss & Troy, LPA, Cincinnati, OH; and Jeffrey P. Harris of Statman Harris & Eyrich, LLC, Cincinnati, OH, for appellants.

Sharon Kegerreis and Lara O'Donnell Grillo of Berger Singerman LLP, Miami, for appellee DJSP Enterprises, Inc.

Spencer A. Tew and Jeffrey A. Tew of Rennert Vogel Mandler & Rodriguez, P.A., Miami, for appellee David J. Stern.

Dennis A. Nowak and Caitlin M. Trowbridge of Rumberger, Kirk & Caldwell, Miami, for appellee Kumar Gursahaney.

Kuntz, J.

Philadelphia Financial Management of San Francisco, LLC and Blue Lion Master Fund, L.P. ("the investors") filed a lawsuit in the circuit court asserting claims for fraud and negligent misrepresentation. The court found the claims were barred by the doctrine of res judicata because they were previously raised in a federal court action, and entered final summary judgment in favor of the defendants.

The investors raise two issues on appeal. First, they argue that res judicata should not have precluded their state court lawsuit due to the discovery of new evidence after the entry of the federal court's judgment. As to this argument, we affirm without further discussion. See, e.g. , Jarvis v. Analytical Lab. Servs. , 499 Fed.Appx. 137, 140 (3d Cir. 2012) (citing L–Tec Elecs. Corp. v. Cougar Elec. Org., Inc. , 198 F.3d 85, 88 (2d Cir. 1999) ) ("Newly discovered evidence does not prevent the application of res judicata unless it was either fraudulently concealed or it could not have been discovered with due diligence.").

Second, they argue the federal court's judgment was not a final adjudication on the merits of their state claims and, therefore, the state lawsuit was not barred by res judicata. For the reasons explained below, we disagree and affirm the circuit court's detailed order applying res judicata as a bar to the investors' state court complaint.

Background

Analyzing the applicability of res judicata to the complaint in this case requires a brief review of the investors' three lawsuits against the defendants:

a. The first federal lawsuit: Philadelphia Financial Management of San Francisco, LLC v. DJSP Enterprises., Inc. , No. 0:10-cv-61261-WJZ, 2011 WL 4591541 (S.D. Fla. Sept. 30, 2011) ;

b. The second federal lawsuit: Philadelphia Financial Management of San Francisco, LLC v. DJSP Enterprises., Inc. , No. 0:12-cv-61018-WJZ, 2013 WL 12080186 (S.D. Fla. Sept. 12, 2013), adopted by ECF No. 44 (Oct. 2, 2013), aff'd , 572 Fed.Appx. 713 (11th Cir. 2014) ; and

c. The instant state court action.

a. The First Federal Lawsuit

In 2010, several investors filed a lawsuit in the United States District Court for the Southern District of Florida against DJSP Enterprises, Inc., David J. Stern, and Kumar Gursahaney. See Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enters., Inc. , No. 0:10-cv-61261-WJZ, 2011 WL 4591541 (S.D. Fla. Sept. 30, 2011). The investors "pled a securities-fraud claim against all Defendants under Section 10(b) of the Securities Exchange Act of 1934 (‘the Act’) and SEC Rule 10b–5, as well as a controlling-persons claim against Stern and Gursahaney under Section 20(a) of the Act." Id. at *8.

Judge Zloch dismissed the investors' amended complaint in the first federal lawsuit without prejudice, denying a request for further amendment for failure to sufficiently advise the court as to the substance of any potential amendments. Id. at *17–18.

b. The Second Federal Lawsuit

In 2012, the investors filed the second federal lawsuit in the Southern District of Florida. See Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enters., Inc. , No. 0:12-cv-61018-WJZ, 2013 WL 12080186 (S.D. Fla. Sept. 12, 2013), adopted by ECF No. 44 (Oct. 2, 2013), aff'd , 572 Fed.Appx. 713 (11th Cir. 2014).

With the exception of additional paragraphs that did "not add material facts to the original allegations," and two slightly amended paragraphs, the complaint filed in the second federal lawsuit was factually similar to the complaint in the first federal lawsuit. Id. at *2, *4. The investors argued to the federal court that the complaint itself was different because "it allege [d] two common-law claims," state law claims of fraud and negligent misrepresentation. Id. at *5. Notably, the investors asserted that the district court had jurisdiction over the state law claims under both 28 U.S.C. § 1332 (diversity jurisdiction) and 28 U.S.C. § 1367(a) (supplemental jurisdiction).

Magistrate Judge Hunt issued a report and recommendation to Judge Zloch: concluding the complaint filed in the second federal lawsuit was substantially similar to the complaint that was dismissed in the first federal lawsuit and it failed to cure any deficiencies; and recommending dismissal. Id. at *4. The report and recommendation also noted that while the court could exercise supplemental jurisdiction over the pendent state law claims, there was a presumption against pendent jurisdiction and the investors failed to address the issue in their briefing. Therefore, the magistrate judge recommended the state law claims be dismissed, as well. Id. Later, Judge Zloch overruled the investors' objections and adopted the magistrate judge's report and recommendation.

The investors appealed the district court's dismissal of the second federal lawsuit, and the Eleventh Circuit affirmed. Phila. Fin. Mgmt. of S.F., LLC v. DJSP Enters., Inc. , 572 Fed.Appx. 713 (11th Cir. 2014). With regard to the investors' state law claims, the Eleventh Circuit determined the issues were waived, stating, "In their appellate brief, the plaintiffs do not challenge the dismissal of the state-laws claims or the denial of their Rule 59(e) motion. As such, we consider these issues abandoned." Id. at 718 n.3 (citation omitted).

c. The State Court Lawsuit

After the Southern District dismissed the second federal lawsuit, but two weeks before the Eleventh Circuit affirmed the dismissal, the investors filed this lawsuit in the Broward County Circuit Court. The state court complaint named the same defendants and asserted the same state law claims at issue in the second federal lawsuit.

The defendants filed a motion for summary judgment, arguing that the investors were required to proceed with the state law claims in federal court—the forum the investors themselves had selected. The state circuit court determined: the federal district court's dismissal of the second federal lawsuit was a final judgment on the merits; the state court action was precluded because there was a basis for subject matter jurisdiction in the federal action which the investors did not pursue; the state court action arose out of the same transaction or series of transactions as the federal action; and "all the elements of the doctrine of res judicata are present." Therefore, the court granted the motion for summary judgment and entered judgment in favor of the defendants.

The investors appealed the court's judgment, challenging the court's application of the doctrine of res judicata.

Analysis

We review the trial court's application of the doctrine of res judicata de novo. Philip Morris USA, Inc. v. Douglas , 110 So.3d 419, 427 (Fla. 2013).

a. Governing Law

First, we must determine whether state or federal preclusion principles apply. Generally, our case law instructs that when res judicata is asserted based upon a prior federal court judgment, we apply federal claim preclusion principles. Dalbon v. Women's Specialty Retailing Grp. , 674 So.2d 799, 801 (Fla. 4th DCA 1996) ; Andujar v. Nat'l Prop. & Cas. Underwriters , 659 So.2d 1214, 1216 (Fla. 4th DCA 1995). As explained below, we would state it differently if we were writing on a clean slate.

The Supreme Court of the United States "has the last word on the claim-preclusive effect of all federal judgments" and we must apply whatever "federal rule that th[e] Court deem[s] appropriate. " Semtek Int'l Inc. v. Lockheed Martin Corp. , 531 U.S. 497, 507–08, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001) (emphasis in original). The Supreme Court has directed that we apply federal common law when analyzing the preclusive effect of a federal judgment. Id. at 508, 121 S.Ct. 1021. However, "[t]hat federal common law determines the preclusive effect of an earlier [federal] judgment against a party ... has likely caused confusion" in the federal case law and our own. CSX Transp., Inc. v. Gen. Mills, Inc. , 846 F.3d 1333, 1337 (11th Cir. 2017).

The confusion that the Eleventh Circuit discussed in General Mills exists because "federal common law" is misunderstood and applied inconsistently. Our case law is correct that we apply federal common law when addressing the preclusive impact of a federal court's judgment. However, our case law after Semtek does not distinguish between the judgments of a federal court when exercising its federal question jurisdiction and judgments of a federal court when exercising its diversity jurisdiction over the plaintiff's claims. We uniformly apply a preclusion standard that was borrowed from the federal courts. Consequently, we have confused the law that Semtek compels us to follow.

Based upon Semtek , "federal common law" applies when determining the preclusive impact of a prior federal judgment. However, "the federal common law contains different rules of claim preclusion that change depending on the form of jurisdiction exercised by...