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CHRYSLER CORP. v. FEDDERS CORP.

August 5, 1981

CHRYSLER CORPORATION, Plaintiff,
v.
FEDDERS CORPORATION, et al., Defendants



The opinion of the court was delivered by: ACKERMAN

On March 4, 1981, a complaint was filed in this Court by the plaintiff, Chrysler Corporation, alleging four counts of fraudulent conspiracy and violations of the Securities Exchange Act of 1934, as amended, against the defendants, Fedders Corporation and five individuals who allegedly dominated that corporation's management group. Shortly thereafter, Chrysler filed a notice of lis pendens upon realty owned by Fedders in Edison, New Jersey. The 75-page complaint in this Court alleges a conspiracy to defraud Chrysler through a series of acts beginning shortly before a February 23, 1976 agreement between the two corporations, whereby Fedders agreed to purchase Chrysler's Airtemp Division, and continuing until the present. In addition to seeking $ 85 million in compensatory damages, the complaint seeks the imposition of either a constructive trust or an equitable lien upon the Edison real estate, and punitive damages. The case is before me today on the defendants' (hereinafter collectively referred to as Fedders) motion to dismiss, transfer or stay the action. The principal object of the motion is the discharge of the notice of lis pendens filed by Chrysler, although it is also clear that Fedders would prefer not to have to defend this lawsuit in addition to those it is already involved in with Chrysler elsewhere.

The parties before me have been at loggerheads over the Airtemp conveyance since shortly after it took place. A great deal of litigation has resulted in both this country and abroad. Fedders, which claims that Chrysler owes it more than $ 63 million in damages as a result of a variety of contract breaches and other misdeeds, has generally refused to make any of the payments that Chrysler claims are still owed under the February 23, 1976 agreement. This lawsuit, apparently the seventh initiated by Chrysler, is the latest round in Chrysler's attempt to receive the consideration that it claims to be owed and/or compensation for the damages it has suffered as a result of Fedders' alleged misdeeds. All of these lawsuits are presently pending, although an order granting partial summary judgment to Chrysler on one of its claims in one of these lawsuits has been affirmed by New York State's highest court, the Court of Appeals.

 Chrysler states that it chose to prosecute what it considers to be the new claims presented in the lawsuit before me as a new lawsuit in New Jersey rather than as an addition to one of its pending lawsuits because of its belief that only a court sitting in New Jersey has the power to order the imposition of a constructive trust, or an equitable lien on land in New Jersey. It considers the availability of this remedy, and the related filing of the notice of lis pendens, to be extremely important to secure its interests because of its belief that Fedders is a failing corporation that may not be able to satisfy a money judgment. For its part, Fedders believes that Chrysler has filed the suit and notice of lis pendens in order to increase Chrysler's power in settlement negotiations at a time when Fedders has publicly announced plans to sell some of the lands affected by the notice of lis pendens.

 Fedders' motion seeks to discharge the lis pendens through success on any one of four theories:

 One, it argues that this lawsuit should be dismissed due to the res judicata effects of the partial summary judgment achieved by Chrysler in one of its two New York State court actions and affirmed by that State's highest court.

 Two, it argues that this lawsuit should be dismissed because the restitution and rescission claims allegedly presented here by Chrysler are inconsistent with the affirmation of the contract manifested by Chrysler's other lawsuits.

 Three, it argues that this lawsuit should be dismissed, stayed, or transferred in venue to the Southern District of New York, due to a pending lawsuit in that district between Chrysler and Fedders.

 Four, it argues that New Jersey's lis pendens statute, N.J.S.A. 2A:15-6 et seq., is unconstitutional on due process grounds.

 Because the focus of the present motion is whether the notice of lis pendens affecting the Edison property should be discharged, I will decide that issue first.

 Well-established principles of jurisprudence require me to avoid the consideration of constitutional questions unless absolutely necessary. E. g., Halderman v. Pennhurst School, 612 F.2d 84, 94 (3d Cir. 1979) (en banc), reversed on other grounds, -- - U.S. -- , 451 U.S. 1, 101 S. Ct. 1531, 67 L. Ed. 2d 694 (1981). I will, therefore, begin with a consideration of Fedders' other arguments for dissolution of the lis pendens.

 There is no question that the New Jersey lis pendens statute is applicable to claims such as the ones in this case that seek to impress a constructive trust or an equitable lien on property in this state. See Polk v. Schwartz, 166 N.J.Super. 292, 298, 399 A.2d 1001 (App.Div.1979). Under the terms of the statute, the lis pendens may only be discharged by: One, a final judgment in favor of the defendant-owner of the property, N.J.S.A. 2A:15-14; two, a complete and final satisfaction of the claim against the defendant-owner, N.J.S.A. 2A:15-17; three, the posting of a sufficient bond, approved by the court, in lieu of the lis pendens, N.J.S.A. 2A:15-15; four, the plaintiff-claimants' failure to diligently prosecute the action, N.J.S.A. 2A:15-10; or five, the passage of three years after the date of the filing, N.J.S.A. 2A:15-11.

 Aside from its constitutional challenge, Fedders argues that either a dismissal, a stay, or a change of venue should discharge the lis pendens. I agree with Fedders that a dismissal of this lawsuit would discharge the lis pendens. N.J.S.A. 2A:15-14. I disagree, however, with its contentions that a stay or a change of venue would provide it with similar relief. Neither a stay nor a change in venue would constitute a judgment in the defendants' favor because the lawsuit would not be over. Nor would either action support a discharge due to plaintiff's failure to prosecute diligently, since the delay would be attributable to the court rather than to the plaintiff. N.J.S.A. 2A:15-10. Finally, although a change in venue would remove the lawsuit beyond New Jersey's borders, it would not in and of itself discharge the lis pendens, since the statute only requires that the action be properly instituted in either a state or a federal court in New Jersey having proper civil jurisdiction and not that the action be actually litigated within the borders of the state. N.J.S.A. 2A:15-6.

 Since this court has both personal jurisdiction over the parties and subject matter jurisdiction by virtue of the diversity of the parties and the federal claims arising under the Securities Exchange Act of 1934, the suit was properly instituted here. A subsequent change of venue to the Southern District of New York, or any other district, would not provide a discharge.

 Accordingly, I will defer consideration of both the question of whether to stay this action and whether to order a change of venue until after I have determined whether the lis pendens should be discharged. The remainder of Fedders' arguments, summarized above, will be considered seriatim, beginning with the argument that this case should be dismissed due to res judicata.

 In Allen v. McCurry, 449 U.S. 90, 101 S. Ct. 411, 66 L. Ed. 2d 308 (1980), the Supreme Court reaffirmed the importance of the related doctrines of res judicata and collateral estoppel to the federal courts. The court also restated the principal tenets of those doctrines. According to that opinion:

 
The Federal courts have traditionally adhered to the related doctrines of res judicata and collateral estoppel. Under res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. Cromwell v. County of Sac, 94 U.S. 351, 352 (24 L. Ed. 195). Under collateral estoppel, once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case. Montana v. United States, 440 U.S. 147, 153 (99 S. Ct. 970, 973, 59 L. Ed. 2d 210). (5. The Restatement of Judgments now speaks of res judicata as "claim preclusion" and collateral estoppel as "issue preclusion." Restatement of Judgments (Second) § 74 (Tent. Draft No. 3, 1976). Some courts and commentators use "res judicata" as generally meaning both forms of preclusions ....) As this court and other courts have often recognized, res judicata and collateral estoppel relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and by preventing inconsistent decisions, encourage reliance on adjudication. Id. at 153-154 (99 S. Ct. at 973-974).
 
The federal courts generally have ... consistently accorded preclusive effect to issues decided by state courts. E. g., Montana v. United States, supra; Angel v. Bullington, 330 U.S. 183 (67 S. Ct. 657, 91 L. Ed. 832). Thus, res judicata and collateral estoppel not only reduce unnecessary litigation and foster reliance on adjudication, but also promote the comity between state and federal courts that has been recognized as a bulwark of the federal system. See Younger v. Harris, 401 U.S. 37, 43-45 (91 S. Ct. 746, 750-751, 27 L. Ed. 2d 669).
 
Indeed, though the federal courts may look to the common law or to the policies supporting res judicata and collateral estoppel in assessing the preclusive effect of decisions of other federal courts, Congress has specifically required all federal courts to give preclusive effect to state court judgments whenever the courts of the state from which the judgments emerged would do so;
 
"The ... judicial proceedings of any court of any state ... shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such state ...."

 28 U.S.C. § 1738 (1976); Huron Holding Corporation v. Lincoln Mine Operations, 312 U.S. 183, 193 (61 S. Ct. 513, 517, 85 L. Ed. 725); Davis v. Davis, 305 U.S. 32, 40 (59 S. Ct. 3, 6, 83 L. Ed. 26) ....

 Allen v. McCurry, 449 U.S. at 94 - 96, 101 S. Ct. at 414-416 (footnotes 6-8 omitted.)

 Fedders argues that the New York Court of Appeals decision affirming a grant of partial summary judgment in favor of Chrysler in one of the two suits between Chrysler and Fedders in the New York State courts should act as a bar to the present lawsuit. In the language of the Restatement, they are arguing that claim preclusion should apply to prevent the assertion of new claims in this suit that should have been brought in the earlier New York State lawsuit. In order to address this question, it is necessary first to understand the factual background of the two lawsuits and the resultant relationship between them, and then to apply the law of the State of New York in order to determine whether the suit before me is precluded.

 On February 23, 1976, when the two corporations signed an agreement in connection with the Airtemp conveyance, Fedders allegedly agreed to pay Chrysler the aggregate of, one, $ 18 million in cash; two, one and a half million shares of Fedders preferred stock, series B; three, a note issued by Fedders, subject to adjustment after an audit, for $ 10,539,965.00; and four, the assumption by Fedders of certain liabilities owed by Chrysler. The complaint in the suit before me generally alleges that Fedders entered into this agreement as part of a fraudulent conspiracy to obtain the assets of the Airtemp Division without proper consideration and to otherwise damage Chrysler.

 The claim upon which Chrysler obtained partial summary judgment in New York related to Fedders' refusal to pay dividends on the Series B preferred stock. The New York courts ruled that Chrysler owned the stock and was owed $ 3,900,000.00 in dividends plus interest. Fedders attempted to assert a variety of counterclaims and defenses arising from Chrysler's alleged breach of the February 23, 1976 agreement in order to avoid payment of the claim. On appeal, the New York Court of Appeals held, with regard to these defenses and counterclaims, that "Fedders' remedy is one for damages under the contract and not an avoidance of the independent obligation to pay dividends on the Series B shares." See affidavit of Lawrence N. Weiss, filed April 8, 1981, Exhibit 7.

 Fedders' argument before me is that the suit brought by Chrysler to recover this interest should have also included the claims brought in the present suit because Chrysler came to own the shares and to be owed the interest as a result of the same series of transactions that are at issue in the present suit. This argument is principally ...


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