On certification to the Superior Court, Appellate Division.
The opinion of the Court was delivered by Pollock, J. Chief Justice Wilentz and Justices Clifford, Handler, O'Hern, Garibaldi, and Stein join in this opinion.
This appeal concerns the preclusive effect of a federal judgment in a state court. specifically, it requires us to decide whether state law claims brought in a state court are precluded by a prior federal court judgment dismissing federal law claims based on the same facts, if the federal claims were dismissed for insufficient service of process and for lack of standing.
Plaintiffs, Murrell Watkins and Abraham McDaniel and their wholly-owned companies, sued Resorts International (Resorts), Bally's Park Place Casino (Bally's), and other defendants in federal district court, claiming that as minority bus-line owners they had been the targets of discriminatory practices. The claims, which sought relief pursuant to 42 U.S.C. sections 1981, 1983, 1985(3), and 1988, were dismissed on motion for various reasons, including insufficient service of process and lack of standing.
Relying on state law, Watkins and McDaniel then filed this action in the Superior Court based on the same allegations of discrimination that underlay their federal claims. The Law Division granted defendants' motion to dismiss, R. 4:6-2(e), on the ground that plaintiffs were barred by the entire controversy doctrine from relitigating the same cause of action that had already been decided in federal court. See R. 4:30A (formerly R. 4:27-1(b)). In an unreported decision, the Appellate Division affirmed on grounds of res judicata, collateral estoppel, and the entire controversy doctrine. We granted certification, 122 N.J. 195 (1990), and now reverse the judgment of the Appellate Division and remand the matter to the Law Division. Although state courts must honor judgments of federal courts, dismissals for insufficient service of process or lack of standing do not preclude relitigation. Consequently, the federal judgments against Watkins and McDaniel do not bar their state claims.
For purposes of this appeal, we accept the facts as alleged in the complaint. Heavner v. Uniroyal, Inc., 63 N.J. 130, 133 (1973). Plaintiff Watkins and his wife were the sole shareholders in Ocean Breeze Transit Company (Ocean Breeze), a bus company that operated service to Atlantic City casinos. Plaintiff McDaniel owned Cobra Coach Lines, Inc. (Cobra), which also operated bus service to Atlantic City. Plaintiffs, who are black, allege that Resorts and Bally's discriminated against them by interfering with their efforts to operate bus lines to the casinos.
In 1982 Resorts granted Ocean Breeze permission to provide bus service to its casino. When the first Ocean Breeze bus arrived, however, a casino representative told the driver that the buses should not return because they were too old and dirty. According to Watkins, Resorts executive Alan McClain later told Watkins: "Just because you niggers get a license
and buses, we do not have to let you into the casino. " Finally, McClain informed Watkins that Ocean Breeze would not be allowed to service Resorts unless it used buses less than two years old. Resorts, however, continued to allow white-owned bus companies with older buses to provide transportation to the casino.
Watkins alleges that Bally's also discriminated against him. When Watkins began servicing the casino around 1980, McClain was Bally's project manager. According to Watkins, McClain and another Bally's executive, Eugene McDermott, helped several white-owned bus companies to usurp Watkins's designated territories. Claiming that these companies had failed to comply with licensing requirements, Watkins notified defendant Frank Fitzsimmons of the New Jersey Department of Transportation (DOT), but Fitzsimmons took no action. Watkins alleges that Fitzsimmons's failure to take action "eventually resulted in the revocation of his line run from Cape May to [Resorts and Bally's]." He alleges further that because of defendants' discrimination, he and his wife were forced to mortgage their home and sell their Ocean Breeze shares to avoid personal bankruptcy.
McDaniel alleges that he was the victim of similar racial discrimination. Resorts denied his request for Cobra to provide transportation because it did not want black groups coming to the casino. White-owned companies, however, were subsequently permitted to provide transportation from the same sites. When McDaniel later sought permission to operate new lines from Harlem and the South Bronx, McClain allegedly told him that the people from those neighborhoods were not the type of people Resorts wanted in its casino.
McDaniel further alleges that when he sought to establish a line from Harlem and the South Bronx to Bally's, McClain told him that lines from those neighborhoods were undesirable. According to McDaniel, McDermott said he was concerned about the number of blacks in the casino. Bally's, however,
later granted permission for a white-owned company to service those areas. McDaniel alleges that as a result of defendants' discrimination, he lost his investment in Cobra and was forced to declare personal bankruptcy.
On August 27, 1984, Watkins, McDaniel, Ocean Breeze, and Cobra filed suit in the United States District Court for the District of New Jersey, claiming civil rights violations under 42 U.S.C. sections 1981, 1983, 1985(3), and 1988. The complaint named the same defendants as in the instant matter: Resorts, Bally's, McClain, McDermott, the DOT, and Fitzsimmons. Plaintiffs did not assert any pendent state claims. Eventually, the federal court dismissed all of the claims. First, on June 12, 1985, the court dismissed plaintiffs' section 1983 claim. Plaintiffs stipulated to a dismissal with prejudice of their section 1985 claim, leaving only the section 1981 claim and the derivative section 1988 claim for attorneys' fees. Then, on November 27, 1985, the court dismissed the complaint against Bally's for insufficient service of process under Federal Rule of Civil Procedure 4(j). specifically, the court dismissed the complaint without prejudice because plaintiffs had failed to serve the summons and complaint on Bally's within 120 days of filing the complaint, contrary to Federal Rule of Civil Procedure 4(j). Plaintiffs voluntarily dismissed their complaint against DOT.
Most significantly for our purposes, the district court on November 27, 1985, granted Resorts' motion to dismiss the complaint of the individual plaintiffs, Watkins and McDaniel, because they lacked standing to sue. Relying on federal law, the court explained that a shareholder, even a sole shareholder such as McDaniel, cannot maintain a civil rights action to redress damages suffered by a corporation. The court held that Watkins' sale of his Ocean Breeze stock did not confer standing on him to maintain such an action. The United States Court of Appeals for the Third Circuit affirmed the judgment dismissing the individual plaintiffs' claims. The district court then dismissed the remaining counts in an order that stated:
It appearing that it has been reported to the Court by plaintiffs' counsel that plaintiffs do not wish to proceed any further in this matter;
It is on this 27th day of May, 1987, ORDERED that this action is hereby DISMISSED with prejudice.
Plaintiffs did not appeal from that order.
Shortly thereafter, Watkins and McDaniel brought suit in the Law Division. As in the federal action, they claimed that as minority bus-line owners they were the targets of discrimination by the two casinos, their employees, and DOT. Plaintiffs alleged the same facts as those in their federal complaint. Instead of alleging violations of federal anti-discrimination laws, however, plaintiffs founded their claims entirely on state law, asserting violations of article I, paragraph 1 of the New Jersey Constitution; the Casino Control Act, N.J.S.A. 5:12-1 to -190, N.J.S.A. 5:12-135; and the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 to -42.
Resorts moved to dismiss the complaint, arguing that the entire controversy doctrine, res judicata, or collateral estoppel precluded plaintiffs' action. It argued that no private cause of action existed under the Casino Control Act. The court agreed that the state cause of action was essentially the same as the federal action, and that the entire controversy doctrine barred plaintiffs from relitigating the matter. The trial court therefore granted the motion to dismiss. As to DOT, the court dismissed plaintiffs' complaint for failure to state a claim.
Before the Appellate Division, plaintiffs argued that the federal court had not determined the matter on its merits and that therefore neither res judicata, collateral estoppel, nor the entire controversy doctrine should bar the state court action. The Appellate Division disagreed, and affirmed the dismissal. As to Resorts, the court viewed the dismissal for lack of standing as a resolution on the merits, stating that the district court's "holding was that the claims which the individual plaintiffs were asserting belonged solely to their corporations and, therefore, the individuals were not entitled to redress." The court held that plaintiffs' claims against Resorts were barred
by res judicata or collateral estoppel. As to Bally's, the court affirmed the dismissal on the ground of the entire controversy doctrine. The court determined that although the federal dismissal for insufficient service of process was not on the merits and therefore did not itself preclude the state suit, Bally's was a necessary party and the dismissal of the federal suit against Resorts barred a later action against Bally's.
A fundamental feature of the relationship between state and federal courts is that the courts of each system must respect the judgments of courts of the other system. That respect is essential to the fair and efficient functioning of our federalist system of justice. The rule that state courts must accord preclusive effect to prior federal court judgments is so settled that it is accepted as axiomatic. Younger v. Jensen, 26 Cal. 3d 397, 411, 605 P.2d 813, 822, 161 Cal. Rptr. 905, 914 (1980); Pilie & Pilie v. Metz, 547 So. 2d 1305, 1308-09 (La. 1989); Velasquez v. Franz, N.J. , (1991) (slip op. at 10-11); Bardo v. Commonwealth Dep't of Pub. Welfare, 40 Pa. Commonw. 585, , 397 A.2d 1305, 1307 (1979); see also Degnan, Federalized Res Judicata, 85 Yale L.J. 741, 744-45 n.17 (1976) (citing early state cases reciting the rule). This case requires that we search for the reasons beneath the rule.
Our inquiry begins with the full faith and credit clause of the United States Constitution, which provides that "full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." U.S. Const. art. IV, § 1. That clause directs the courts of each state to give preclusive effect to the judgments of a sister state. The clause, however, does not expressly require state courts to accept the judgments of a federal court.
Nor does the federal full faith and credit statute, 28 U.S.C.A. § 1738, impose that requirement. The statute provides that
judicial proceedings (of any State, Territory, or Possession of the United States] * * * 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, Territory or Possession from which they are taken.
Because they are included in "every court within the United States," federal courts are required to give full faith and credit to the judgments defined in the statute. The judgments so defined, however, are those "of any State, Territory, or Possession of the United States," not those of the federal courts. Thus, the statute does not compel state courts to give preclusive effect to judgments of the federal courts. In sum, neither the constitutional full faith and credit clause nor the corresponding federal statute solves the problem.
Some older cases purported to find the answer in the full faith and credit clause of the federal constitution. See Bigelow v. Old Dominion Copper Mining & Smelting Co., 225 U.S. 111, 129, 32 S. Ct. 641, 643, 56 L. Ed. 1009, 1022 (1912) (addressing federal-state preclusion issue as one governed by the full faith and credit clause and its implementing statute, and holding that a federal court judgment "is entitled to the same sanction which would attach to a like judgment of a court of the state"); National Foundry & Pipe Works v. Oconto City Water Supply Co., 183 U.S. 216, 233, 22 S. Ct. 111, 118, 46 L. Ed. 157, 169 (1902) (holding that state court's failure to give due effect to federal court decree raises federal question, citing, inter alia, Jacob v. Marks, 182 U.S. 583, 587, 21 S. Ct. 865, 867, 45 L. Ed. 1241, 1244 (1901), a state-state interjurisdictional preclusion case based on the full faith and credit clause); Hancock Nat'l Bank v. Farnum, 176 U.S. 640, 645,
20 S. Ct. 506, 507-08, 44 L. Ed. 619, 621 (1900) (reciting the constitutional and statutory full faith and credit rule for state-state preclusion, and then stating that "the fact that this judgment was rendered in a court of the United States, sitting within the state of Kansas, instead of one of the state courts, is immaterial"). Courts also looked to the federal full faith and credit statute or its predecessor. See Bigelow, supra, 225 U.S. at 133, 32 S. Ct. at 643, 56 L. Ed. at 1023; Hancock Nat'l Bank, supra, 176 U.S. at 642, 20 S. Ct. at 507-08, 44 L. Ed. at 620; Embry v. Palmer, 107 U.S. 3, 2 S. Ct. 25, 30-31, 27 L. Ed. 346, 348-49 (1883); see also Supreme Lodge, Knights of Pythias v. Meyer, 265 U.S. 30, 33, 44 S. Ct. 432, 433, 68 L. Ed. 885, 888 (1924) (citing Hancock Nat'l Bank and Embry v. Palmer for rule of federal-state preclusion); Hazen Research, Inc. v. Omega Minerals, Inc., 497 F.2d 151, 153 n.1 (5th Cir. 1974) (courts have read "into § 1738 a requirement that state courts extend full respect to the judgments of federal judicial tribunals within the states"); Shell Oil Co. v. Texas Gas Transmission Corp., 176 So. 2d 692, 696 (La. Ct. App. 1965) ("The statute, 28 U.S.C. § 1738, requires each state to give the same effect to the judgments of state and federal courts ...