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Bates Marketing Associates Inc. v. Lloyd''s Electronics Inc.

Decided: May 4, 1983.


On appeal from the Superior Court, Law Division, Bergen County.

Michels, Pressler and Trautwein. The opinion of the court was delivered by Pressler, J.A.D.


The primary issue raised by this appeal is the applicability to this cause of action of the entire controversy doctrine. The trial judge, concluding that that preclusionary doctrine was here applicable, dismissed the action with prejudice. We reverse.

Plaintiffs Bates Marketing Associates, Inc. (Bates), a Delaware corporation having its principal place of business in New York, and Toy Advisory Guild, Inc. (TAG), a Delaware corporation having its principal place of business in New Jersey, are in the business of developing and marketing toys. In 1976 they entered into negotiations with a then newly formed partnership, Products International, whose partners were two corporations, Lavco Inc. and Lloyd's Western Corp. (Western), both California corporations. Products International proposed, among other activities, to promote and market plaintiffs' products, and an arrangement was entered into pursuant to which plaintiffs delivered prototypes for various of their toys to the partnership, and TAG leased space to the partnership. It appears that thereafter the partnership failed to take any steps to evaluate and market the toys and refused to return the prototypes. Concluding that their arrangement with the partnership had been fraudulently induced by the partnership's misrepresentations regarding its financial strength and marketing expertise, and alleging that the partnership's wrongful conduct resulted in their loss of profits, royalties and marketing opportunities, plaintiffs brought a diversity action in the federal district court for the southern district of New York in 1978 against the partnership, against its partners, Lavco and Western, and against one Bernard Lavitch, a California resident, who was the owner of Lavco. They sought damages for the losses above

described, for the conversion of the prototypes and for unpaid rent.

Plaintiffs were unable to effect service of process in the federal action on Lavco or Lavitch but did serve Western and the partnership pursuant to California Long Arm Statute, C.P.L.R. ยง 302, by personally serving Western's registered agent in California. Western did not file an answer and default was entered against it. Thereafter, a proof hearing was conducted by a federal magistrate, who recommended damages for Bates in the sum of $575,770.95 and damages in favor of TAG in the sum of $21,863.45. Default judgment against Western and the partnership was entered in March 1980 in accordance with these recommendations. The judgment could not, however, be satisfied because of the insolvency of both Western and Products International and the consequent seizure of Product International's assets by a bank creditor.

This action, instituted in the Law Division in September 1980, represents the second stage of plaintiffs' attempt to secure a remedy for the alleged injurious acts of Western. Western, it appears, is a wholly owned subsidiary of defendant Lloyd's of California, Inc. (California, Inc.), allegedly a New Jersey corporation. California, Inc. in turn is a wholly owned subsidiary of defendant Lloyd's Electronics, Inc. (Electronics), a Delaware corporation. Each is alleged to have its principal place of business in New Jersey. The theory of the complaint is that both California, Inc. and Electronics are alter egos of Western and hence that each is liable for Western's actions. In short, plaintiffs are seeking to pierce the corporate veils of both California, Inc. and Electronics which otherwise would insulate them from liability for Western's obligations. It is against this factual and relational background that defendants successfully sought to have this action dismissed on the basis of the entire controversy doctrine.

We are of the view that the doctrine was incorrectly applied. As we understand the entire controversy doctrine, its

scope embraces only the consequences of a litigant's failure in the first action to have joined claims by and among those who were already parties thereto. Hence it is not a rule requiring the joinder of nonparties. Thus, the doctrine is typically available to preclude the subsequent litigation of claims which were not but should have been raised in the initial litigation, provided, however, that those unraised claims involved parties to the initial litigation. Consequently, a claim against a person who was not a party to the initial litigation is ordinarily not precluded from being subsequently litigated even if it is the same as or transactionally related to the claim which was the subject of the initial litigation. See Aetna Ins. Co. v. Gilchrist Brothers, Inc., 85 N.J. 550, 558-560 (1981); McFadden v. Turner, 159 N.J. Super. 360 (App.Div.1978). And see Gareeb v. Weinstein, 161 N.J. Super. 1 (App.Div.1978); Moss v. Jones, 93 N.J. Super. 179 (App.Div.1966). Cf. Wm. Blanchard Co. v. Beach Concrete Co., Inc., 150 N.J. Super. 277 (App.Div.1977), certif. den. 75 N.J. 528 (1977). It is further significant to note in this regard that when the entire controversy doctrine was first expressly provided for by the rules of court in 1979, it was included as part of R. 4:27, which deals with joinder of claims, rather than R. 4:28, which addresses joinder of parties. See R. 4:27-1(b), adopted July 16, 1979, to be effective September 10, 1979.

Since neither California, Inc. nor Electronics was a party to the federal litigation, plaintiffs are not, at least prima facie, precluded from attempting by this second action to hold them answerable for Western's acts. The question, then, is whether there is some unique characteristic of the claims made here against these defendants which would affect the usual predicates of the entire controversy doctrine and would extend its bar to claims against persons not parties to the original action. We perceive none.

First, we reject these defendants' suggestion that their alleged identity to the defendant in the federal action has any special preclusive ...

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