Gargallo v. Merrill Lynch, Pierce, Fenner & Smith - 918 F.2d 658 (6th Cir. 1990)

Gargallo v. Merrill Lynch, Pierce, Fenner & Smith

918 F.2d 658 (6th Cir. 1990)

I. Issue

1) Whether a federal court must apply federal or state claim preclusion law in deciding 2) whether a prior state court judgment upon subject matter over which only a federal court has jurisdiction is a bar to a subsequent federal court claim upon the identical cause of action.

II. Fact

The brokerage firm filed suit for collection.  In response, Gargallo filed an answer and counter claim against Merrill Lynch, alleging that Merrill Lynch had violated federal securities laws.  The state court dismissed Gargallo's counterclaim with prejudice. citing Ohio Civil Rule 37 (substantially identical to Federal Rule 37), for refusal to comply with Merrill Lynch's discovery requests and the court's discovery orders.  Gargallo then filed a complaint in the United States District Court charging Merrill Lynch and its account executive with violating federal securities laws based on the same transactions at issue in the state litigation.  The district court dismissed the suit on res judicata grounds, finding that the issues, facts and evidence to sustain this action are identical to the claims asserted against the brokerage firm in the counterclaim that was dismissed with prejudice by the state court.  Gargallo appealed.

III. Holding

The issues, facts, and evidence to sustain this action are identical to the claims asserted in P's state counterclaim.  The federal claim or cause of action giving rise to this appeal is the same claim or cause of action that was asserted in the counterclaim dismissed in the sate court litigation.  Thus, Ohio claim preclusion law would bar the claim asserted in P's district court complaint had it been filed in an Ohio court.

However, federal securities laws are within the exclusive jurisdiction of the federal courts.  Thus, Ohio court judgment may not be given claim preclusive effect in a subsequent federal court action asserting those same claims because Ohio courts would not give claim preclusive effect to a prior final judgment upon a cause of action over which the Ohio court had no subject matter jurisdiction.