RICK SUTTON INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF RJANO HOLDINGS INC AND MAISON ROYALE LLC v. JACK ADAMS MAISON ROYALE LLC AND RJANO INC (2023)

Writ application granted. See per curiam.

JDH

JLW

SJC

JTG

WJC

JBM

PDG

Supreme Court of Louisiana March 07, 2023

Writs granted. In these applications, the applicant, Rick Sutton, seeks review of: 1) an April 26, 2019 judgment of Division N of the Orleans Parish Civil District Court, w herein the court sustained Jack Adams' exceptions of no right of action and resjudicata and dismissed the applicant's Breach of Contract suit with prejudice; 2) a ruling of the Fourth Circuit Court of Appeal sustaining Adams' exception of res judicata and reversing a December 7, 2018 judgment ¹ of Division L rendered in favor of the applicant on his mandamus action; and, 3) the Fourth Circuit's reversal of a September 3, 2019 judgment of Division L which overruled the exception of res judicata filed by Maison Royale, LLC in opposition to the applicant's third-party demand and granted the applicant's motion for nullity. Specifically, the Fourth Circuit: sustained Maison Royale's exception of res judicata and dismissed the applicant's third-party demand against it with prejudice; sustained Adams' exception ofnonjoinder ofindispensable parties; vacated the district court's grant of the motion for nullity; and, dismissed the nullity motion filed by applicant in Division L.

THE RICO JUDGMENT

The objections raising the exceptions of resjudicata in these matters all arise from a single judgment rendered by Division D on October 25, 2017 (the RICO judgment.) Applicant instituted the proceedings underlying the RICO judgment with the filing of a Petition for Damages, naming Jack Adams, Charles Adams (Jack Adams' father), and Polly Point Imports Corporation, as defendants. Therein, the applicant alleged causes of action for: (1) violations of the Louisiana Racketeering Act (RICO); (2) violations of the Louisiana Unfair Trade Practices Act (LUTPA); (3) fraud and misrepresentation; (4) breach of fiduciary duty; and, (5) detrimental reliance. Applicant claimed that Adams breached the settlement agreement entered into by the parties subsequent to the filing of the Breach of Contract suit filed in Division N, failed to disclose information that was pertinent to the settlement, and failed to negotiate in good faith. Applicant further alleged that Adams, his father, and Polly Point impermissibly sold jewelry at the Maison Royale, LLC store at “fire sale” prices, in violation of the settlement agreement, as well a-; in violation of the RICO and LUTPA statutes, through fraudulent means, and in breach of fiduciary duties owed to him. Following a hearing, the district court rendered the RICO judgment, wherein it sustained the exception of no cause of action as to all of the applicant's claims, and sustained the exception of no right of action as to the RICO, LUTPA, and breach of fiduciary duty claims, dismissing the applicant's claims against all defendants with prejudice. The RICO judgment was affirm.ed on appeal and writs were denied by the Louisiana Supreme Court. Sutton v. Adams, 18-196

(La. App. 4 Cir. 12/19/2018), 318 So.3d 776, writ denied, 19-346 (La. 4/22/19), 267 So.3d 1112, reconsideration denied, 19-346 (La. 9/6/19), 278 So.3d 362.

RES JVDICATA

Resjudicata is designed to “promote judicial efficiency and final resolution of disputes,” and generally precludes the re-litigation of claims arising out of the same facts and circumstances between the same parties of a previous suit in which there is a valid, final judgment. Avenue Plaza, LLC v. Falgoust, 96-173 (La. 7/2/96), 676 So.2d 1077. The standard ofreview of a peremptory exception of res judicata requires an appellate court to determine if the trial court's decision is legally correct. Myers v. Nat'l Union Fire Ins. Co. of Louisiana, 09-1517, p. 5 (La. App. 4 Cir. 5/19/10), 43 So.3d 207, 210 (citation omitted). Louisiana courts recognize that “a final judgment has the authority of res judicata only as to those issues presented in the pleading and conclusively adjudicated by the court.” Id. Moreover, the doctrine of res judicata is strictijuris and, accordingly, any doubt concerning the applicability of the principle must be resolved against its application. Interdiction of Hunter, 18-685 (La. App. 4 Cir. 12/19/18), 318 So.3d 784, writ denied. 19-208 (La. 4/8/19), 267 So.3d 608.

The requirements that must be met for Louisiana courts to determine that a matter is resjudicata are set forth in LSA-R.S. 13:4231, as follows:

Except as otherwise provided by law, a valid and final judgment is conclusive between the same parties, except on appeal or other direct review, to the following extent:

(1) If the judgment is in favor of the plaintiff, all causes of action existing at the time of final judgment arising out of the transaction or occurrence that is the subject matter of the litigation are extinguished and merged in the judgment.

(2) If the judgment is in favor of the defendant, all causes of action existing at the time offinaljudgm.ent arising out ofthe transaction or occurrence that is the subject matter of the litigation are extinguished and the judgment bars a subsequent action on those causes of action.

(3) A judgment in favor of either the plaintiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined ifits determination was essential to that judgment.

I. April 26, 2019 Judgment

We note that the applicant's Breach of Contract suit, filed in November of 2014, was filed two years prior to the RICO suit filed in November of 2016. Under its plain language, the res judicata statute applies to bar “a subsequent action” between the same parties as to causes of action existing at the time of the final judgment and arising out of the same transaction or occurrence that is the subject matter ofthe litigation. LSA-R.S. 13:4231(2). Additionally, “[a] judgment in favor of either the plaintiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that judgment.” LSA-R.S. 13:4231(3). (Emphasis added). This court has previously explained that, regarding resjudicata, “the chief inquiry is whether the second action asserts a cause ofaction which arises out ofthe same transaction or occurrence that was the subject matter of the first action.” Burguieres v. Pollingue, 02-1385 (La. 2/25/03), 843 So.2d 1049, 1053. (Emphasis added). Insofar as the district court sustained an exception ofresjudicata rendered in a subsequent action to bar the claims alleged in the Breach ofContract suit (a prior suit), the court essentially applied resjudicata in reverse. Based on the clear and unambiguous language ofthe statute, the district court erred in finding that the RICO judgment was resjudicata as to the applicant's Breach ofContract suit.

Notwithstanding the statutory language, even assuming that a subsequent action could bar a prior action, we find error in the lower courts' determination that the “failed business relationship” between the parties was the relevant “transaction or occurrence” in these suits. The causes of action alleged in the applicant's Breach of Contract suit arise from claims that Adams breached an oral agreement that was reached by the parties. Specifically, the applicant alleged that, in the summer of 2011, the parties agreed to open a jewelry store and fine art gallery together, and that two entities would be formed: Rjano Holdings, Inc., to lease the property; and Maison Royale, LLC, to operate the store. Applicant further alleged that the parties agreed that Adams would handle all of the corporate and LLC paperwork, including filing the requisite formation documents. Applicant alleged that, in October of 2014, Adams breached their agreement and effectively froze him out of the business, causing him financial losses. As such, the applicant, individually and derivatively on behalf of Rjano Holdings, Inc. and Maison Royale, LLC, filed a petition for damages for breach of contract and injunctive relief, preventing Adams from acting unilaterally on behalf of Rjano Holdings, Inc. and Maison Royale, LLC. On December 1, 2014, judgment was rendered in favor of the applicant, granting the injunctive relief he sought.

In the RICO suit, the applicant reiterates the parties' factual history, stating that he and Adams agreed to form Rjano Holdings, Inc. and Maison Royale, LLC for the purpose of operating a jewelry store and fine art gallery, but that Adams essentially froze him out of the business in October of 2014, necessitating the filing of the Breach of Contract suit. Applicant further alleged that, in December of 2015, after the Breach of Contract suit was filed, the parties entered into a settlement agreement, pursuant to which the applicant was to buy out Adams' interest in Maison Royale, LLC. Applicant alleges, however, that Adams failed to honor the settlement agreement, and that he “committed numerous acts demonstrating that he never intended to settle the outstanding issues,” and conspired with his father, Charles Adams, to hold a “fire sale” at Maison Royale, LLC and offer up to 70% discounts on items subject to the proposed settlement agreement. Additionally, the applicant alleged that Adams fraudulently induced him to enter into the settlement agreement without disclosing all of the material facts. Applicant alleged that defendants' “pattern of conduct” violated the RICO and LUTPA statutes, and asserted various causes of action stemming from Adams' alleged failure to honor the settlement agreement, his fraudulent and bad faith dealings, and his attempts to defraud the applicant.

Based on the respective allegations, the suits are clearly based on separate and distinct causes of action. While the Breach of Contract suit seeks damages for actions that occurred prior to November 2014, and arising from the breach of the parties' agreement vis-a-vis the formation, control, and operation ofRjano Holdings, Inc. and Maison Royale, LLC, the RICO suit seeks damages resulting from Adams' breach of the December 15, 2015 settlement agreement, and his actions in conducting a fire sale and mishandling the financial assets of the business, all of which occurred on or after December 15, 2015. Additionally, we note that the applicant attempted to supplement and amend the breach of contract suit to add the RICO suit causes of action. The district court, however, would not allow the amendment. According to the applicant, the court did not want to enlarge the pleadings. In any event, the applicant was therefore required to file a separate lawsuit in order to preserve his claims.

II. December 7, 2018 Judgment

We also find error in the Fourth Circuit's rulings sustaining the exceptions of resjudicata filed by Adams and Maison Royale, LLC, and dismissing the applicant's mandamus action and third-party demand, with prejudice. We initially note that both the mandamus action and the third-party demand were filed in response and/or opposition to Adams' Abuse ofProcess suit. Specifically, it was Adams' allegation that he was the sole shareholder ofRjano Holdings, Inc. in the second supplemental and amending abuse of process petition that prompted the applicant to request the issuance of a Writ ofMandamus and a Writ of Quo Warranto directed to Adams, pursuant to LSA-C.C.P. arts. 3901,² 3902,³ and 3864.⁴ The Writ of Quo Warranto ordered Adams to show by what authority he claimed to represent the interests of Rjano Holdings, Inc., and to establish who Rjano's shareholders were. The Writ of Mandamus directed Adams to either recognize the applicant's 50% ownership interest in Rjano Holdings, Inc., or show cause why he should not have to do so. A four-day evidentiary trial was held at which the parties introduced “substantial evidence,” as well as extensive testimony.⁵ Following the trial, Division L rendered judgment, ordering Adams to recognize the applicant's 50% ownership of Rjano Holdings, Inc. and prohibiting him from asserting any claim that he may act unilaterally for or on Rjano 's behalf without a vote of the shareholders. In his appeal of the December 7, 2018 judgment, Adams raised the exception of res judicata, alleging that the applicant's mandamus action was barred by the RICO judgment. The Fourth Circuit sustained Adams' exception, finding that Adams' Abuse of Process suit, the applicant's mandamus action, and the RICO suit all arose from the same business agreement and dispute over control and operation of the store, and therefore, the causes ofaction asserted in the mandamus action arose out ofthe same transaction or occurrence that was the subject matter of the RICO suit. Consequently, the Fourth Circuit sustained Adams' exception of res judicata, reversed the December 7, 2018 judgment making the applicant's mandamus action peremptory, and remanded the case for further proceedings on Adams' Abuse of Process claims.

As stated previously, the causes ofaction alleged in the RICO suit arose from Adams' breach of the December 2015 settlement agreement, and his failure to engage in good faith negotiations and fair dealing, as well as his actions in allegedly selling store inventory at “fire sale” prices, in breach ofthe parties' agreement and his fiduciary duties. The December 7, 2018 mandamus judgment resulted from the applicant's request for reliefpursuant to LSA-C.C.P. arts. 390l, 3902, and 3864, and was prompted by the allegation ofAdams that he was the sole shareholder ofRjano Holdings, Inc. In light ofthe responsive nature ofthe applicant's request for the writ of mandamus, and considering the allegations raised in the RICO suit, we find that the causes of action raised in the two did not arise from the same transaction or occurrence. The Fourth Circuit's ruling, sustaining the exception of resjudicata and dismissing the December 7, 2018 judgment on the mandamus is in error.

ill. September 3, 2019 Judgment

We likewise find legal error in the Fourth Circuit rulings with regard to the September 3, 2019judgment.⁶ Specifically, we find that the Fourth Circuit erred in reversing Division L's denial ofMaison Royale's exception ofresjudicata to the applicant's third-party demand and dismissing the demand with prejudice based on its determination that the issue of the applicant's membership in Maison Royale, LLC was “conclusively determined” in the RICO judgment. Maison Royale, LLC is not a party to the RICO suit, nor does any language whatsoever regarding Maison Royale's membership appear in the RICO judgment. We further note that, in its reasons for judgment, Division L notes that the RICO judgment was rendered and affirmed without the benefit ofthe four-day trial during the Writ ofQuo Warranto proceedings that were held in that court. Specifically, the court noted that, “[i]n this proceeding, and having heard the extensive testimony ofMr. Adams, including the invocation ofhis Fifth Amendment rights, this Court determined that Mr. Adams had little to no credibility whatsoever.” The court further noted that it determined the “limited documents” relied upon by the RICO court to be oflittle to no value, and that, in light ofmore extensive, developed testimony and evidence, it had found the applicant to be a member ofRjano Holdings, Inc., “a corporation that Mr. Adams himselftestified was rolled directly into [the] Maison Royale partnership.” In any event, the court found that the “particular issues” raised in the applicant's reconventional demand, third-party demand, and petition for declaratory judgment had not previously been adjudicated, and that the matters raised therein were distinguishable from the issues presented in the RICO case. Thus, resjudicata did not attach.

EXCEPTIONAL CIRCUMSTANCES

Louisiana law provides that an earlier judgment does not bar another action by the plaintiff when exceptional circumstances justify relief from the resjudicata effect of the judgment. LSA-R.S. 13:4232(A)(l). This provision gives the court discretion to grant relief from the judgment for exceptional circumstances. This discretion must be exercised on a case-by-case basis and such relief should be granted only in truly exceptional cases, otherwise the purpose ofresjudicata would be defeated. Nevertheless, this discretion is necessary to allow the court to balance the principle of resjudicata with the interests of justice. The official comment to the statute refers to Rule 60(b) of the Federal Rules of Civil Procedure for guidance on what constitutes “exceptional circumstances.” Rule 60(b) gives courts wideranging equitable discretion to relieve a party from a final judgment, “especially if no intervening rights have attached in reliance upon the judgment and no actual injustice will ensue.” 11 Charles Alan Wright, Arthur R. Miller, and Mary Kane, Federal Practice and Procedure§ 2857, 256 (2nd ed. 1995). In particular, Rule 60(b)(6) is a “grand reservoir of equitable power to do justice in a particular case when relief is not warranted” on other grounds specified in the rule, and this clause “gives the courts ample power to vacate judgments whenever such action is appropriate to accomplish justice.” Hesling v. CSX Transp., Inc., 396 F.3d 632, 643 (5th Cir. 2005); Chauvin v. State Farm Mut. Auto. Ins. Co., 2007 WL 2903321, at *6 (E.D. La. 2007). It is designed to protect those drawn into error by an awkward factual or legal scenario, not those who can allude to no circumstance to justify their inaction below. Spear v. Prudential Property and Cas. Ins. Co., 98-1663 (La. App. 4 Cir. 1/13/99), 727 So.2d 640, 642-43; Centanni v. Ford Motor Co., 93-1133 (La. App. 3 Cir. 5/4/94), 636 So.2d 1153, writ denied. 94-1949 (La. 10/28/94), 644 So.2d 656.

The evidence admitted at the trial of the mandamus in Division L indicates a risk ofa miscarriage ofjustice in this case.⁷ Adams admitted under oath to falsifying alleged corporate documents which he attempted to introduce into evidence as proof that he was the sole shareholder ofRjano Holdings, Inc.⁸

CONCLUSION

For the reasons expressed herein, we vacate the April 26, 2019 judgment rendered by Division N of the Orleans Parish Civil District Court, the Fourth Circuit's ruling sustaining the exception of res judicata as to the applicant's mandamus action, and the Fourth Circuit's ruling sustaining the exception of res judicata and dismissing with prejudice the applicant's third-party demand against Maison Royale, LLC, with prejudice. These matters are remanded to Division N for a contradictory hearing pursuant to LSA-C.C.P. art. 1561,⁹ LSA-C.C.P. art. 253.2,¹⁰ and CDC App. 9.3 of the Louisiana District Court Rules,¹¹ to determine whether consolidation would be appropriate and/or in the interest ofjustice.

VACATED AND REMANDED WITH INSTRUCTIONS.

FOOTNOTES

1.   The December 7, 2018 Judgment ordered Adams to recognize the applicant's 50% ownership in Rjano Holdings, Inc. and prohibited Adams from asserting any claim that he may act unilaterally for, or on behalf of, Rjano Holdings, Inc. without a vote of all shareholders. Adams v. Sutton, 19-0247 (La. App. 4 Cir. 10/12/22), -- So.3d--, 2022 WL 6944288.

2.   LSA-C.C.P. art. 3901 states:Quo warrauto is a writ directing au individual to show by what authority he claims or holds public office, or office in a corporation or limited liability compauy, or directing a corporation or limited liability compauy to show by what authority it exercises certain powers. Its purpose is to preventusurpation ofoffice or ofpowers.

3.   LSA-C.C.P. art. 3902 states:When the court finds that a person is holding or claiming office without authority, the judgment shall forbid him to do so. It may declare who is entitled to the office aud may direct au election when necessary.When the court finds that a corporation or limited liability compauy is exceeding its powers, the judgment shall prohibit it from doing so.

4.   LSA-C.C.P. art. 3864 states:A. A writ ofmandamus may be directed to a corporation or au officer thereofto compel either ofthe following:(1) The holding of au election or the performance of other duties required by the corporation's articles ofincorporation or bylaws, or as prescribed by law.(2) The recognition ofthe rights ofthe corporation's members or shareholders.B. A writ ofmandamus may be directed to a limited liability compauy or a member or mauager thereofto compel either ofthe following:(1) The holding ofau election or the performance of other duti.es required by the limited liability company's articles oforganizati.on or operating agreement, or as prescribed by law.(2) The recognition ofthe rights ofthe limited liability company.

5.   It is noted that Adams testified at the hearing, however, he ultimately invoked his 5th Amendment right against self-incrimination.

6.   In the September 3, 2019 judgment, Division L: denied Adams' exception ofnonjoinder of indispensable parties, granted the applicant's motion to declare the RICO judgment an absolute nullity, and denied Maison Royale's exceptions to the applicant's third-party demand., including the exception of resjudicata.

7.   The evidence introduced at that trial established that the applicant: I) signed a lease on the store premises as a duly authorized representative ofRjano Holdings, Inc., and as a personal guarantor, assuming personal liability in excess of $2 million; 2) took no salary or other wages for approximately 15 months; 3) put over $57,000 ofhis own money into the business in cash loans and equity investments; and, 4) worked exclusively for the business, including making sales, managing employees, traveling to view and purchasing art for sale in the store.

8.   At the trial ofthe mandamus, Adams attempted to introduce a copy ofa purported stock certificate as evidence that he was the sole shareholder of Rjano Holdings, Inc. However, during his testimony, he admitted under oath that he had altered the purported certificate by both signing and “back dating” the document well after litigation between th.e parties had co=enced.

9.   LSA-C.C.P. art. 156l(A) states:A. When two or more separate actions are pending in the same court, the section or division of the court in which the first filed action is pending may order consolidation of the actions for trial or other limited purposes after a contradictory hearing, upon a finding that co=on issues of fact and law predominate, and, in the event a trial date has been set in a subsequently filed action, upon a finding that consolidation is in the interest of justice. The contradictory hearing may be waived upon the certification by the mover that all parties in all cases to be consolidated consent to the consolidation.

10.   The intcrdivisional transfer of cases is governed by LSA-C.C.P. art. 253.2, which states as follows:After a case has been assigned to a particular section or division ofthe court, it may not be transferred from one section or division to another section or division within the same court, unless agreed to by all parties, or unless it is being transferred to effect a consolidation pursuant to Article 1561. However, the supreme court, by rule, may establish uniform procedures for reassigning cases under circumstances where an expeditious disposition ofcases may be effectuated.

11.   CDC App. 9.3 states, in pertinent part, as follows:ALLOTMENT OF CASES***4. To achieve continuity of case management, and to avoid the appearance of forum shopping, it is the policy of the court that subsequent but related cases should be transferred to the division to which the orii,,'lllal case was allotted, whether or not such earlier case is still pending. It shall be the duty of any attorney in such cases to call to the court's attention the existence ofsuch earlier case.***TRANSFER AND CONSOLIDATIONl. To facilitate the fair and expeditious resolution of cases, it is the policy of the court to transfer to the lower numbered suit and consolidate for trial those cases in which such consolidation is appropriate. The transfer and consolidation shall be by order of the judge to whom the case is being transferred, after contradictory hearing with all parties in each case, or with their written approval. It shall. be the duty of any attorney in any case which ought to be consolidated to so move or call to the court's attention the pendency of related cases that should be considered for consolidation.

PER CURIAM