Somogyi filed a separate answer on November 2, 1978 denying the material allegations of the complaint and asserting three affirmative defenses: (1) that the guarantee was void for lack of consideration; (2) that the Butler Trustees had failed to relet the premises and thereby mitigate damages; and (3) that the Butler Trustees had wrongfully dispossessed the tenants from the leased premises on August 16, 1978 without first providing three days notice as required in the lease. Somogyi did not assert as defenses either common law fraud or violation of state or federal securities laws.
On December 11, 1978, the Butler Trustees served a notice for discovery and inspection, requesting the production of records and documents in Somogyi's custody and control. Upon Somogyi's failure to comply, the Butler Trustees moved in Special Term for an order compelling compliance. The motion was granted, and an order was entered by Justice Stiller on January 25, 1979 directing Somogyi to produce the requested documents.
Despite the order, Somogyi failed to comply with the discovery request and on November 6, 1979 the Butler Trustees moved for an order directing that the issues be deemed resolved in their favor and that judgment be entered against Somogyi. On April 30, 1979, after appearances by counsel and oral argument, Justice Mintz of the Supreme Court of New York entered an order pursuant to New York Civil Practice Law and Rules (CPLR) 3126 granting partial summary judgment against Somogyi in the amount of $ 27,714.81, representing part of the rent and taxes alleged to be due, together with costs and interest, for his failure to comply with the discovery order. The remainder of the action was severed for further proceedings. On May 22, 1979, judgment was entered in the Erie County Clerk's Office, pursuant to the order, for the sum of $ 31,200.97. Somogyi did not appeal the judgment.
On February 7, 1980, after commencing the present action, Somogyi moved before Justice Mintz for an order pursuant to New York CPLR 5015 vacating the prior order of April 30, 1979. Section 5015 provides that a court which has rendered a judgment may "relieve a party from it upon such terms as may be just ... upon the grounds of ... fraud, misrepresentation, or other misconduct of an adverse party..." As grounds for his motion, Somogyi alleged that he was pursuing an action against the Butler Trustees in the federal district court of New Jersey for fraud and securities law violations.
On August 18, 1980, the Butler Trustees cross-moved for an order granting them (1) additional partial summary judgment in the amount of $ 12,042.52, with interest, representing further rent due under the original complaint; and (2) granting them leave to serve a supplemental complaint alleging additional rent and taxes due under the lease and guarantee agreements arising after the date of the original complaint.
In a memorandum decision dated September 19, 1980, Justice Mintz denied Somogyi's motion to vacate the order of April 30, 1979. Somogyi's reliance on New York CPLR 5015, the Court held, was misplaced because "the fraud which that section addresses itself to is fraud practiced upon a party which results in the relief sought being granted not general fraud underlying the transaction between the parties." (Defendants' Exhibit X). The Court further noted that Somogyi could have filed an amended answer asserting a defense of fraud, but failed to do so prior to issuance of the order granting partial summary judgment against him. In the same decision, Justice Mintz granted the Butler Trustees' motion for additional partial summary judgment in the amount of $ 15,518.52 for rent and taxes due under the original complaint, and granted leave to file a supplemental complaint. The Court provided, however, that enforcement of the May 22, 1979 judgment in the amount of $ 31,200.97 and also the judgment to be entered could be stayed pending the outcome of Somogyi's federal court action on condition that he post a bond or other security in an amount sufficient to secure the judgments.
On November 7, 1980, judgment in the amount of $ 17,700.27 was entered against Somogyi pursuant to the Court's memorandum decision of September 19, 1980 and ensuing order of October 30, 1980. Neither of the judgments obtained by the Butler Trustees have been appealed in the courts of New York.
The Butler Trustees, after obtaining the original judgment against Somogyi in New York in the amount of $ 31,200.97 on May 22, 1979, brought an action in the Superior Court of New Jersey, Law Division, on June 22, 1979 to enforce the judgment. (Defendants' Exhibit R). Somogyi filed an answer in which he denied that the judgment against him had been obtained on the merits and in which he asserted three affirmative defenses: (1) that the complaint failed to state a cause of action; (2) that the "allegations made by the plaintiffs arise out of transactions which were fraudulent in nature" and "(accordingly) ... if a judgment was obtained ... it was one that was obtained through fraud and is therefore not enforceable in a New Jersey Court"; and (3) that "the claims made by the plaintiffs ... arise out of transactions in connection with the purchase of securities by defendant Somogyi and Somogyi Volkswagen Inc. and therefore are more properly a subject of a (sic) action in Federal District Court to be filed by defendant Somogyi". As a "counterclaim", Somogyi sought a stay of the action "pending the resolution of the claims of fraud against plaintiffs and other persons associated with them to be filed in Federal District Court". (Defendants' Exhibit S).
The Butler Trustees moved for summary judgment in the Superior Court on November 2, 1979. The Court denied the motion without prejudice on November 14, 1979 and permitted Somogyi to file an action in federal district court alleging fraud and federal securities laws violations. On January 25, 1980, six days before the filing of the present complaint, the Butler Trustees renewed their motion for summary judgment. According to the Butler Trustees' New Jersey counsel, Somogyi's counsel "vigorously opposed" the motion, arguing, among other things, that the New York judgment was not entitled to full faith and credit in New Jersey because it had been obtained on a personal guarantee fraudulently procured from Somogyi. Nevertheless, the Superior Court ruled that summary judgment should be granted against Somogyi. An order was entered on February 4, 1980, four days after the filing of the federal complaint, awarding judgment in favor of the Butler Trustees in the amount of $ 31,200.97, together with interest. (Defendants' Exhibit U). That judgment is currently on appeal in the Appellate Division of the Superior Court of New Jersey. (Defendants' Exhibit V).
Plaintiff contends, in Counts 1 and 2 of his complaint, that in the course of selling the assets and good will of the Buffalo dealership, renting the dealership premises, and issuing a Volkswagen dealership franchise, defendants violated a number of provisions of the federal securities laws. In particular, plaintiff alleges violations of Section 17(a) of the 1933 Act, 15 U.S.C. § 77q, Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.
Defendants move to dismiss these counts for failure to state a claim under the federal securities laws. In light of the extensive materials outside the pleadings which have been submitted by both parties and not excluded from consideration, the motion will be treated as one for summary judgment.
The question presented is whether one who purchases the assets of a business for cash, simultaneously incorporating the business and issuing to himself the bulk of the capital stock, is entitled to a fraud action against the seller of the business under the federal securities laws.
Section 17(a) of the 1933 Act provides that "(it) shall be unlawful for any person in the offer of sale of securities" to engage in fraudulent acts or practices, misrepresent material facts or omit to state material facts. Section 10(b) of the 1934 Act provides that "(it) shall be unlawful for any person ... (to) use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance" in contravention of rules promulgated by the Securities and Exchange Commission. Rule 10b-5 specifies a number of deceptive acts and practices rendered illegal by Section 10(b) "in connection with the purchase or sale of any security."
The United States Supreme Court has established several guiding principles relative to the coverage of the federal securities laws. On the one hand, the Court has held, the securities laws "must be read flexibly, not technically and restrictively," and may be invoked to remedy a wide range of deceptive acts and practices merely "touching" the sale or purchase of securities. Superintendent of Insurance v. Bankers Life & Casualty Company, 404 U.S. 6, 12-13, 92 S. Ct. 165, 168-170, 30 L. Ed. 2d 128 (1971); see also Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S. Ct. 1456, 1471, 31 L. Ed. 2d 741 (1972); SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S. Ct. 275, 284, 11 L. Ed. 2d 237 (1963). On the other hand, the Court has held, not every transaction falling within the literal language of the statutes is covered. "Congress intended the application of these statutes to turn on the economic realities underlying a transaction, not on the name appended thereto." The task falls "ultimately to the federal courts," by looking to the background and purpose of the Acts, "to decide which of the myriad financial transactions in our society come within the coverage of these statutes." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 848-49, 95 S. Ct. 2051, 2058-59, 44 L. Ed. 2d 621 (1975). Furthermore, despite the remedial purpose of the securities laws, a provision is not to be read "more broadly than its language and statutory scheme will permit." Aaron v. SEC, 446 U.S. 680, 695, 100 S. Ct. 1945, 1955, 64 L. Ed. 2d 611 (1980); Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S. Ct. 2479, 2490, 61 L. Ed. 2d 82 (1979).
Bearing these principles in mind, and resolving all inferences in plaintiff's favor, I conclude that the transaction involved here does not fall within the coverage of the federal securities laws.
Plaintiff relies upon an elaborate chain of reasoning in support of his securities laws claims. First, he contends, the issuance of capital stock by Somogyi Volkswagen, Inc. constituted a sale of securities, within the meaning of the Acts, of which he was the purchaser. See Eason v. General Motors Acceptance Corp., 490 F.2d 654, 656 (7th Cir. 1973) (overruled on other grounds by Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 748, 95 S. Ct. 1917, 1931, 44 L. Ed. 2d 539 (1975)); Hooper v. Mountain States Securities Corp., 282 F.2d 195, 202-203 (5th Cir. 1960). Second, he argues, although defendants were not technically the "sellers" of the securities, defendant Edward J. Butler, Jr.'s agreement to personally guarantee the Liberty National Bank loan of $ 100,000, without which the sale would not have been possible, rendered him a "joint venturer" with Somogyi and hence the equivalent of a "seller". See Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 692-93 (5th Cir. 1971). Third, he argues, while no misrepresentations were made regarding the value of the securities he purchased, the overall transaction "falls into the category of cases which involve decisions infected with fraud and manipulation relating to the value of assets given in exchange (for securities) or purchased through a securities transaction." (Plaintiff's Brief at 18). See Eason v. General Motors Acceptance Corp., supra at 656; Movielab, Inc. v. Berkey Photo, Inc., 321 F. Supp. 806 (S.D.N.Y.1970), aff'd 452 F.2d 662 (2d Cir. 1971); Hooper v. Mountain States Securities Corp., supra. Finally, he claims, the necessary causal relationship between defendants' allegedly fraudulent activities and his purchase of securities can be found in the fact that he was "required" by the World-Wide Volkswagen pro forma and the purchase and sale agreement signed in April, 1976 to form a corporation.
Defendants contend, quite simply, that the securities laws counts of plaintiff's action must fail because (1) the overall transaction entered into between plaintiff and defendants did not involve the purchase or sale of any "security" within the meaning of the securities laws, and (2) the transaction fails to satisfy the "in connection with" requirement of the securities laws.
In arguing that the transaction by which plaintiff purchased the assets of Butler Volkswagen, Inc., rented the premises, acquired a franchise and incorporated the business was not a "securities transaction," defendants look to the Supreme Court's requirement in United Housing Foundation, Inc. v. Forman, supra, that a transaction be analyzed in light of its "economic realities". In Forman, the Court held that the "basic test" for distinguishing a transaction covered by the securities laws from other commercial dealings is " "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.' " Id. 421 U.S. at 852, 95 S. Ct. at 2060, quoting SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 1104, 90 L. Ed. 1244 (1946). Defendants contend that plaintiff's acquisition of the shares of Somogyi Volkswagen, Inc., because it constituted an investment in an enterprise whose profitability depended upon his own efforts and not the efforts of others, was not a "securities transaction" covered by the federal securities laws.
While the circumstances of this case are novel, strong support for defendants' argument can be found in a line of recent cases holding that one who purchases a business by acquiring 100% of its stock is not entitled to an action against the seller of the stock under the federal securities laws. E. g., Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir. 1981); Chandler v. Kew, -- - F.2d -- , CCH Sec.L.Rep. (1979 Transfer Binder), P 96,966 (10th Cir. 1977); Anchor-Darling Industries, Inc. v. Suozzo, 510 F. Supp. 659 (E.D.Pa.1981); Barsy v. Verin, 508 F. Supp. 952 (1981); Dueker v. Turner, CCH Sec.L.Rep. (1980 Transfer Binder), P 97,386 (N.D.Ga.1979); but see Mifflin Energy Sources, Inc. v. Brooks, 501 F. Supp. 334 (W.D.Pa.1980); Titsch Printing, Inc. v. Hastings, 456 F. Supp. 445 (D.Colo.1978). These cases proceed upon the theory that the "stock sale" of a business, although facially involving the transfer of securities, is not in "economic reality" the type of transaction to which Congress intended the securities laws to apply. One who acquires complete control of a business by acquiring all of its stock does not rely upon the entrepreneurial efforts of others to obtain profits, but solely upon his own efforts and those of any employees, managerial or otherwise, whom he chooses to hire. Since the day-to-day management of the corporation lies in the hands of the purchaser, the stock transferred amounts to a mere vehicle for the transfer of assets and an "index of ownership" of the purchased corporation, not an "investment of money in a common enterprise with profits to come solely from the efforts of others." United Housing Foundation, Inc. v. Forman, supra 421 U.S. at 852, 95 S. Ct. at 2060.
If a "stock purchase" of a corporation is not, in economic reality, the type of transaction to which the securities laws were intended to apply, it follows a fortiori that plaintiff Somogyi's "assets purchase" and contemporaneous formation of a new corporation is not a covered "securities transaction". It is undisputed that plaintiff, in return for his capital contribution to Somogyi Volkswagen, Inc., received well over 90% of the shares of the new corporation.
Armed with this controlling interest, plaintiff had the right to exercise complete control over the day-to-day activities of the business. Whether he chose to delegate the dealership's management to one or more employees or operate the business himself, the profitability of the business depended upon his own entrepreneurial efforts and ability, not that of others.
Indeed, the economic realities of plaintiff's "assets purchase" and incorporation lie at an even farther remove from the traditional concerns of the federal securities laws than the transactions involved in the "stock purchase" cases. Here, although plaintiff did acquire shares of stock, he did not acquire them from defendants. In effect, he issued the shares to himself as a means of limiting his liability to creditors and to the public at large.
Whether plaintiff had chosen to form a corporation or not, he clearly would have been required to invest the same amount of capital in the Volkswagen dealership as a condition of obtaining the franchise. By incorporating, plaintiff did not increase his risk by placing his money in the hands of others; rather he reduced his risk by limiting his liability. Hence, even though plaintiff may technically argue that he was a "purchaser" of statutorily defined "securities," he cannot, under Forman's "economic realities" test, be said to have engaged in the type of transaction to which Congress intended the securities laws to apply.
Plaintiff argues that Forman's "economic realities" test should be applied not to the nature of an overall commercial transaction but only to the character of a specific contract or instrument employed by the parties in a commercial transaction. Thus, in Forman itself, plaintiff points out, the so-called "shares of stock" in question possessed none of the ordinary characteristics of stock instruments: they did not confer the right to receive dividends or to vote in proportion to the number of shares owned, they were not negotiable and they could not appreciate in value. By contrast, plaintiff argues, the shares of Somogyi Volkswagen, Inc. which he "purchased" were unquestionably traditional stock instruments bearing all the characteristics ordinarily associated with securities. Because the instruments he acquired were "securities" in economic reality as well as in name, plaintiff concludes, he should be permitted to bring an action against defendants for fraud whether or not the securities were acquired in a traditional investment transaction. See Mifflin Energy Sources, Inc. v. Brooks, supra and Titsch Printing, Inc. v. Hastings, supra.
Plaintiff's argument, however, will not stand. While the Supreme Court began its analysis in Forman by examining the definition of a "security" under the 1933 and 1934 Acts, it unquestionably extended its analysis to the broader question whether the entire transaction bore the characteristics essential to coverage under the securities laws. "There may be occasions," the Court held, "when the use of a traditional name such as "stocks' or "bonds' will lead a purchaser justifiably to assume that the federal securities laws apply. This would clearly be the case when the underlying transaction embodies some of the significant characteristics associated with the named instrument." Id. 421 U.S. at 850-51, 95 S. Ct. at 2059-60 (emphasis added). Here, however, the Court held that "the disputed transactions (were) not purchases of securities within the contemplation of the federal statutes." Id. at 847, 95 S. Ct. at 2058 (emphasis added). The Court's focus was clearly upon the nature of the commercial arrangement in which an instrument is transferred, not solely upon the legal characteristics of the instrument itself, taken in abstraction. See Anchor-Darling Industries, Inc. v. Suozzo, supra 510 F. Supp. 659.
Even if plaintiff's acquisition of shares in Somogyi Volkswagen, Inc. were one of those transactions whose "economic realities" fall within the coverage of the federal securities laws, I conclude, as an additional ground for dismissal of the federal securities laws claims, that the fraud alleged was not "in connection with" the purchase or sale of securities.
In Superintendent of Insurance v. Bankers Life & Casualty Co., supra, the Supreme Court held that the federal securities laws could be invoked to remedy fraudulent practices "touching" upon the sale or purchase of securities, even though the fraud was not directed to the value of the securities themselves.
Since that time, courts have given a broad application to the "in connection with" requirement. Whether wisely or unwisely, for example, it has been held in this and other circuits that an action lies under the securities laws for fraud relating to the value of assets given in exchange for securities, even though no misrepresentations have been made with respect to the securities themselves.
E. g., Weaver v. Marine Bank, 637 F.2d 157, 163-65 (3d Cir. 1980); Lino v. City Investing Co., 487 F.2d 689, 694 (3d Cir. 1973); Eason v. General Motors Acceptance Corp., 490 F.2d 654, 656 (7th Cir. 1973). The Third Circuit recently observed that "(almost) without exception, (courts) have found compliance with the "connection' requirement even where fraudulent conduct is implicated only tangentially in a securities transaction." Ketchum v. Green, 557 F.2d 1022, 1026 (3d Cir. 1977).
Nevertheless, the "connection" requirement of the securities laws is not without limits. In Ketchum v. Green, supra, the Third Circuit explicitly considered the boundaries of the requirement and found them to have been exceeded even though an identifiable causal relationship existed between the fraud claimed and the purchase and sale of securities.
In Ketchum, defendants succeeded, allegedly by fraud, in acquiring a dominant position upon a company's board of directors. Once they acquired control of the board, defendants voted to oust plaintiffs as officers of the company. Pursuant to a previously negotiated stock retirement agreement, plaintiffs then became contractually obligated to redeem their shares in the corporation at a bargain price.
Looking to Superintendent of Insurance v. Bankers Life & Casualty Co., supra, "as the precedent with which we must concern ourselves," the Third Circuit observed that the teachings of that case are "hardly refined or capable of facile application." Id. at 1027. Nevertheless, it found in the facts of Bankers Life a "fairly tight linkage" between "the securities transaction and the claimed fraud." On the facts before it, by contrast, the court found the "degree of proximity" between the alleged fraud and the forced sale of securities to be "more attenuated". The alleged fraud, "(instead) of being merely one step away from a securities deal," was "somewhat removed from the ultimate transaction." Id. at 1028. Moreover, the court found, to the degree that causation was relevant to the "connection" requirement, see Tully v. Mott Supermarkets, Inc., 540 F.2d 187 (3d Cir. 1976), the chain of causation between the alleged fraud and the ultimate sale of securities was interrupted by independent, intervening causative events. Id. at 1029.
In this case, as in Ketchum, the degree of proximity between the fraud alleged to have been committed by defendants in connection with the sale of the assets of Butler Volkswagen, Inc. and plaintiff's formation of a corporation for the purpose of limiting his liability in connection with the purchased business can only be described as "attenuated". Although plaintiff claims that the purchase and sale agreement he signed with defendants "required" him to form a corporation, it is clear on the face of the documents that he was not required to do so.
The references in the agreement to "the Buyers or a corporation to which the Buyers shall form" clearly indicate that the parties contemplated the formation of a corporation by the purchasers and intended to preserve the buyers' option to acquire the assets and enter a lease in a corporate as well as an individual capacity. Nowhere in the agreement, however, is the formation of a corporation made mandatory. The benefits to plaintiff in forming a corporation and thus limiting his liability were obvious. There is no indication that his decision to do so was anything but unilateral.
That plaintiff might never have formed a corporation "but for" defendants' allegedly fraudulent sale of the assets of Butler Volkswagen, Inc. does not resolve the connection issue. Plaintiff's formation of a corporation and issuance to himself of the bulk of its capital stock was, like the Ketchum plaintiffs' ultimate redemption of their stock, too many steps removed from defendants' alleged fraud to meet the "connection" requirement of the federal securities laws.
In summary, I find that plaintiff's claims do not fall within the coverage of the federal securities laws. Viewing the facts in the light most favorable to plaintiff, the transaction by which plaintiff acquired shares in Somogyi Volkswagen, Inc. was not, in economic reality, the type of transaction to which the securities laws were intended to apply since the profitability of the business depended upon plaintiff's entrepreneurial efforts, not that of others. Even if the transaction were one within the scope of the securities laws, the nexus between the alleged fraud and the ultimate issuance of securities was too attenuated to satisfy the requirement that the fraud take place "in connection with" the purchase or sale of securities. As a matter of law, therefore, defendants are entitled to judgment on Counts One and Two of the complaint.
In the only remaining count of his complaint, Count Three, plaintiff alleges that in the course of selling the assets and good will of the Buffalo dealership, renting the dealership premises, obtaining a lease guarantee and issuing a Volkswagen dealership franchise, defendants committed fraud under the common law of New York and New Jersey.
Plaintiff asserts jurisdiction over these claims under the court's pendent jurisdiction and diversity of citizenship of the parties. In view of the fact that plaintiff's federal claims have been dismissed before trial, I will decline to exercise pendent jurisdiction over the state claims. See United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S. Ct. 1130, 1138, 16 L. Ed. 2d 218 (1966). Jurisdiction over the state claims, therefore, must rest upon diversity of citizenship alone.
Defendants move to dismiss the balance of plaintiff's complaint on res judicata grounds. Since they obtained a final and unappealed judgment in the courts of New York against plaintiff on the lease guarantee agreement, defendants contend, and plaintiff failed to raise a defense of fraud in that action, plaintiff is now barred from pursuing an action for fraud against them in the present action.
In evaluating the effect of a prior judgment under the doctrine of res judicata, the Full Faith and Credit statute, 28 U.S.C. § 1738, requires that the law of the rendering state be applied. See St. John v. Wisconsin Employment Relations Board, 340 U.S. 411, 71 S. Ct. 375, 95 L. Ed. 386 (1951); see generally 18 Wright, Miller & Cooper, Federal Practice and Procedure § 4469 (1981). Defendants' key contention is that, under the law of New York, once a judgment has been obtained on a contract, the validity of the contract is impliedly established and may not be challenged in a subsequent action by a party to the first action. Since plaintiff failed to raise the defense of fraud in their action on the lease and lease guarantee contracts, defendants argue, he is barred from bringing the present action on the ground that these and other agreements were obtained by fraud.
It has been established that "under the New York concept of res judicata a prior judgment is conclusive upon the parties in any subsequent action involving the same cause of action not only as to those issues which were actually litigated but also as to any issues which might have been, but were not, litigated in the earlier action." Winters v. Lavine, 574 F.2d 46, 56 (2d Cir. 1978). In contract actions, this doctrine has been applied to bar subsequent suits not only by plaintiffs but also by defendants who could have, but did not, raise claims or defenses relating to the contract in the first action. See, e.g., Ripley v. Storer, 309 N.Y. 506, 132 N.E.2d 87 (1956); Adamik v. Adamik, 190 Misc. 851, 75 N.Y.S.2d 824 (Sup.Ct. Broome Cty. 1948).
Key to the application of this form of "claim preclusion," however, is an identity between the "causes of action" litigated in the first and second suits. The courts of New York have held that the two actions must have "such a measure of identity that a different judgment in the second would destroy or impair rights or interests established by the first." Schuylkill Fuel Corp. v. B & C Nieberg Realty Corp., 250 N.Y. 304, 306-307, 165 N.E. 456, 457 (1929); see also Ripley v. Storer, 132 N.E.2d, supra at 90. If "the two lawsuits are not predicated on "identical' causes of action," res judicata does not apply but "the New York concept of collateral estoppel comes into play." Winters v. Lavine, supra at 56. The doctrine of collateral estoppel, or "issue preclusion," "bars the relitigation of any issue which would be decisive in the later action and which was (actually) litigated and decided against the litigant in the earlier action." Id.; see also Smith v. Kirkpatrick, 305 N.Y. 66, 111 N.E.2d 209 (1953).
Here, plaintiff claims fraud not only with respect to the lease and lease guarantee agreements, but also with respect to the purchase and sale agreement pursuant to which he purchased the assets and good will of Butler Volkswagen, Inc. While there may be some issues common to both suits, the actions are clearly not "identical." The rights and liabilities of the parties under the purchase and sale agreement and the lease agreements are separate and independent from one another. Although the signing of a lease was made a condition of the purchase and sale of the business, a valid purchase and sale agreement was not a condition of the lease. Moreover, the parties to the two contracts were different. The seller of the business was Butler Volkswagen, Inc., represented by its sole shareholder, Edward J. Butler, Jr.; the lessor of the premises was the Butler Trust. Finally, the agreements were clearly preceded by different negotiations and representations as to price and other terms of the bargain.
The New York cases relied upon by defendants for the proposition that one who could have, but did not, raise claims or defenses relating to a contract in an earlier action is barred from challenging the validity of the contract in a subsequent action presuppose actions based upon the same contract. See Ripley v. Storer, 132 N.E.2d, supra at 93 and cases cited therein. Here, the second action involves an agreement whose validity was not essential to the initial judgment. Assuming that the doctrine of collateral estoppel will apply to bar the relitigation in the present action of any issues of fact and law previously decided in the New York action, a "different judgment in the second action will not "destroy or impair rights or interests established by the first." Schuylkill Fuel Corp. v. B & C Nieberg Realty Corp., supra. The precise issues to be given collateral estoppel effect, however, cannot be determined at this stage of the proceedings.
For the foregoing reasons, defendants' motion to dismiss the complaint on res judicata grounds will be denied.
Having stated a claim for common law fraud in the sale of the assets of Butler Volkswagen, Inc., plaintiff is entitled to a trial on the Third Count of his complaint despite defendants' earlier recovery of a judgment on the lease guarantee agreement for rent due under the lease.
Defendants also move for summary judgment on their first counterclaim, based upon the judgments they obtained against plaintiff in the state courts of New York and New Jersey in the total amount of $ 48,901.24. In view of the fact, however, that the court which originally entered these judgments has seen fit to enter a stay, I do not believe it is appropriate at this juncture to enter an order enforcing those judgments. The motion for summary judgment on the first counterclaim will therefore be denied, without prejudice.
Defendants' attorneys are requested to submit a form of order consistent with this opinion.